How do you trade and make a profit on commodity or currency futures?

Question

Is it that you have to predict what future prices will bring? How do you make money doing this? Someone told me you might have to wind up with a load of crops on your doorstep? How do I avoid that from happenning? Where do I find the rules? Is this a lot like buying stock options?

Answer 1

To put it simply, if you pick the right direction, you make money. Else, you lose. Commodities are highly leveraged.

Corn, wheat, cattle, etc. It won't wind up on your doorstep as long as you close out your contract before expiration (very important!).

Most people who trade these are suppliers or users of the products. They use commodities to hedge against price fluctuations and lock in profits or costs so they can plan production, etc.

One of my friends works for a big chicken producer and frequently trades corn to ensure they can feed / raise the chickens for a certain price.

For you and me, we'd most likely trade either currency futures (cash settled) or index futures like the DOW or Emini, etc (also cash settled). You don't get killed by the spread on options and you get a $ for $ return on movement of the futures.

As for rules, here's one site you might start with.

http://www.usafutures.com/

Also check out http://www.lind-waldock.com/

Hope that helps!

Hope that helps!

Answer 2

Futures are indeed contracts to take ownership of a commodity at a certain date. A buyer (taking a long position) agrees to buy a commodity (corn, gold, cotton) at a certain price. The seller (taking the short position) agrees to sell a certain amount of a commodity at an agreed price at an agreed date. Because of this time limit futures expire unlike stocks and many other investments. The buyer can be a person who is actually in the business of buying the commodities for re-sale (a hedger), or they can be buying simply to speculate on price movements (speculator). Although it is possible that should the future expire you may have to take a load of corn, this almost never happens. Usually the positions are liquidated by both parties, the buyer sells futures and the buyer buys further futures (closing out, offsetting or covering).
The advantage of futures is that they are highly leveraged so for a small amount of outlay (normally 10 to 15% of the position) you can make large profits. Obviously the converse is true you can loose a lot more then you originally staked. Normally futures are used to protect the sellers against freak weather patterns, currency fluctuations and other things that might adversely affect the price. They are effectively a type of insurance.
You make money by buying something at a fixed price and hoping that some factors will push that price up so that when you close the position you will pocket the difference as profit. Take corn for instance. If you had bought corn futures before Bushes announcement about increased use of biofuels the price would have surged and you would have done well. Alternately if you believe global warming is altering weather patterns you might believe that crop yields are going to get poorer and poorer, should there be a drought in the season after you bought corn futures you would again make money as the corn price will be much higher when you close your position. Alternatively the seller is protected from a loss of revenue from the crop failing and supposedly everyone is happy.
You can go here http://www.cftc.gov/ to find the rules in America.

Answer 3

You won't wind up with a load of crops on your doorstep. That's an old joke.

The answers to your questions would fill books. I suggest "Futures and Options for Dummies" and "The Futures Game: Who Wins, Who Loses, Why?"

If you don't have time to read at least twenty books before starting, you don't have a chance. You make money by understanding the market better than the guy on the other side of the trade.

Good luck.

Answer 4

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Answer 5

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