Commodity futures market

  • Mar 28 2022
  • by
  • Analyst AZA
Commodity futures market

What Are Commodity Futures Contracts | Basics Of Futures Trading

Commodities are one of the most important sectors of the micro and macro economy. The economy is based on an understanding of how people deal with scarce resources, mostly commodities. We will briefly introduce the individual items and how you can
Speculate on them. Let's start with the most popular - gold. Gold has been used since ancient times and its value was recognized by our ancestors. It is regarded as a store of value by most governments around the world, developed countries prove this fact by storing large amounts of it in volts. Gold is considered a haven during market turmoil. Because it has unique characteristics that set it apart from other metals, it has been used as a medium of exchange alongside silver. People kept their gold reserves in banks, and the banks issued bills of exchange to them as proof of ownership.

Instead of exchanging goods for gold, they used bills of exchange as a medium of exchange. This is how paper money came about. Banks continued to improve the quality of bills to avoid forgeries. As a result, the gold standard was born, meaning that the value of a currency was determined by the amount of gold a country owned. In 1944, an agreement was struck at Bretton Woods allowing gold to be pegged at an exchange rate of $35 an ounce. Gold is used in many products, especially jewelry, and the relationship between the price of gold and the demand for these products has deteriorated. Currently, gold prices are determined by sentiment and fundamental factors. Palladium is one of the platinum group metals (PMG), along with other metals such as ruthenium, osmium, etc. The metals falling under this class are erosion resistant and can be an alternative to platinum.

Palladium is mostly found in automotive parts and also in jewelry. Surge in demand for these products
raise the price of palladium. The stability of palladium will benefit manufacturers that depend on palladium as a production factor. Gasoline is the largest product produced from Brent oil. It is a refined product that is sold in large quantities in many if not all countries. During the 1990s, laws were passed to limit emissions exempted from gasoline, and these laws were enforced by adding ethanol to the blend. Gasoline markets are highly competitive and therefore volatile. Investors may be presented with many opportunities in the gasoline markets due to the fluctuations present in the market. But be aware that because volatility provides more opportunity, it also increases risk.

Companies that refine Brent crude oil to produce gasoline have implemented technological advances that prevent them from producing more gasoline than they otherwise would. Heating oil ranks second after gasoline in the use of Brent oil. It is a reliable source of heat in many households, although usage has declined significantly in recent years. This decline is mainly due to the increased use of alternative fuels such as natural gas, which is a cleaner source of energy.
with high energy content. Natural gas is a substance found underground and formed by the compression of organic materials. Natural gas does not have an unpleasant odor. There is a lot of natural gas that has yet to be discovered, while it is believed that most of the Brent crude oil has already been discovered. The lower a person has to dig to acquire it, the greater the amount. Coffee comes from Ethiopia and made its way to European countries.

From there it spread throughout the world. Today, coffee is one of the commodities consumed all over the world. In earlier centuries, goods were exchanged through barter (this is the exchange of goods without a medium of exchange). In the end, over time, coins began to gain momentum and began to be accepted as a means of payment. Because goods are in high demand, merchants would find themselves in a situation where they sold all their stock while buyers were still looking for their goods. In response, sellers allowed buyers to order goods for future delivery at a premium. This allowed buyers and sellers to lock in contract prices. This was the birth of modern futures markets. Futures markets help producers of goods to hedge their production by entering into a contract that will protect them from market fluctuations that may cause buyers to pay less for their products.
Commodity exchanges facilitate the trading of goods between buyers and sellers and provide regulation in daily practice. As mentioned earlier, a futures contract is an agreement between two parties to supply a certain product in the future, which will be settled at a pre-agreed price. For example, a person buying a wheat contract at 64.50 with an agreement to receive 3 tons of wheat next month would mean that when the contract expires, the buyer will pay the agreed price. Those who hedge their products with futures are required to do so, but speculators willingly take on the risk to make a profit. It should be noted that the majority of futures market participants are speculators. If you want to become a futures trader, you need to understand some fundamental factors.

Futures are traded on margin, which allows the trader to make substantial profits, but can also incur losses. It is statistically proven that 96% of future investors lose their capital. This is not a hint that there are no winning trades, but that most of them are pure overtime losses. First, if you are planning to trade, it is advisable to use funds that you can afford to lose. When you trade with capital that you cannot afford to lose, it can lead to an emotional attachment to money, which can lead to unnecessary mistakes. You also need to be mentally prepared to deal with the daily volatility that can occur throughout the day. You must have a complete understanding of the technical aspects of the market. Beware of beginner's luck, as it can convince the trader that he is invisible and will not take losses.

A trait that losing traders are prone to is emotional attachment to the trade. This is evident when a trader is holding on to a losing trade in the hope that it will reverse and go in his/her favor. Before you enter a trade, you should know how much you are willing to win on a single trade, which will help the trader cut their losses and allow their wins to run. Before opening an account, it is important to find out which brokerage firms provide the best services. Be on the lookout for firms that provide services that are too good to be true because they usually are. Once you decide which firm you will trade with, learn about their products and make sure you fully understand their operations. After that, you can open an account and deposit money. If you don't want all the hassle or don't have time to trade on your own, you can provide commodity funds with capital to trade for you.

Commodity funds provide capital managers with trading capital and compensate them with a percentage of accumulated profits. Commodity prices are highly volatile due to changes in supply and demand, which can be exacerbated by government policies, geopolitical factors, demographics, etc., which can increase risk. They can also be illiquid due to rules that can make it impossible for a trader to enter or exit a position under certain conditions. Because futures are traded at low margins, they can require a trader to have a lot of leverage, which can result in large losses. Thanks for reading and happy trading.

Brief explanations about commodities and how commodity futures markets are traded.


imgaza youtube

Profitable trading recommendations, forex analytics for beginners traders

Subscribe our channel

top authors

Fundamental analyst

Stan Zabar
Fundamental analyst

Head of Analysis Department

Michael Wallenberg
Head of Analysis Department

Economic Observer

Alan Dofine
Economic Observer

Call US Feedback
en de nl fr pt es it uk zh ko ja ar ru pl tr