How to Trade Commodity Futures

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The commodity futures markets provide investors with a way to diversify their investment portfolios. Commodity futures are also noted for their significant profit potential thanks to the amount of leverage traders are able to use when entering positions. If you think you would like to trade the futures markets, do some research to familiarize yourself with the way the markets work. When you're ready, talk to a broker to discuss the possibility of opening a trading account.

Things You'll Need

  • broker
  • margin
  • Open an account with a commodity futures broker.

  • Fund your account. Once you've filled out the necessary paperwork with a broker, it's time to fund your account. Account minimums vary by broker and the minimum margin requirements also vary according to the commodity futures market you're trading. In futures trading, the margin is essentially a performance bond put up by the client. If a trade moves against a client, money is debited from the client's margin account to offset the losses in the futures market. If the margin account falls below the minimum requirement, the client must deposit more margin or exit the market.

  • Choose a market to trade. There are futures markets for commodities such as precious metals, grains, livestock and oil. Additionally, there are futures markets for currencies and financial indices such as the S&P 500 and the NASDAQ 100.

  • Once you've selected a market to trade, choose a contract month. Every futures contract has an expiration, which is specified by the month on the contract. Generally, the majority of trading takes place in the nearest contract month. If you are approaching expiration but want to stay in the market, your broker can roll your position into the next contract month.

  • Determine a position size for your trade. You may trade a single contract or multiple contracts. Remember that each contract increases your potential profit or loss. For example, if you trade 10 futures contracts, your potential profit or loss on the trade is 10 times greater than if you were trading only one contract.

  • Enter your trade. Depending on your broker, you may have the option to call in trades or enter them online. You can place different types of orders. For example, you can specify a price at which you're willing to buy or sell and enter a Good-Til-Cancelled order or enter a market order and buy or sell at the current market price.

  • Monitor your position. After you enter a trade, keep a close eye on the market and close out your position when you are ready to take your profits or cut your losses.

Tips & Warnings

  • Place a stop loss on your orders so that you automatically cut your losses if a trade moves against you.

References

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