Commodity Market : How to trade In Futures ?

The most common perception of futures is that they are a form of very high risk speculation. I won't deny this, but futures are also a widely used financial tool for reducing risk. Trading in commodity futures is the same way as investing in stocks and bonds, and mutual fund managers. There are three main uses of futures trading :

• Capital Appreciation• Leverage• Hedge Against Risk

The reason futures behind the riskiness of commodity futures is because they are usually bought on margin, and each futures contract represents a large amount of the underlying asset.

Trading With Commodity Futures

Futures trading in commodoty market is not every child's play!! You can invest in the commodity futures market only when you are sure of the risks involved and the amount of risk you're willing to take. Consider following these steps:

1. Talk to your broker and ask questions before opening a futures account : The first and foremost rule to be taken care as a futures trader is you should have a solid understanding of how the market and contracts function. You'll also need to determine how much time, attention, and research you can dedicate to the investment.

2. Self Trading : Self trading involves trading with your own account without the aid or advice of a broker. But, this definitly involves the maximum risk because you become responsible for managing funds, ordering trades, maintaining margins, acquiring research and coming up with your own analysis of how the market will move in relation to the commodity in which you've invested. It requires time and complete attention to the market.

3. Broker trade on your behalf : There are also brokers that specialize in futures trading.Open a managed account, similar to an equity account and let your broker trade on your behalf, following the terms and conditions agreed upon when the account was opened. This method can minimize your financial risk because a professional would be making informed decisions on your behalf. Although, you would still be responsible for any losses incurred as well as for margin calls. And you'd probably have to pay an extra management fee.

4. Commodity Pool : Joining a commodity pool, offers the least risk to enter the market. The commodity pool is a group of commodities which can be invested in. It's rules are simple : no person gets an individual account; funds are combined with others and traded as one; the profits and losses are directly proportionate to the amount of money invested. By entering a commodity pool, you also gain the opportunity to invest in diverse types of commodities. However, since the downside risks of the futures market does exist in commodity pool, it is essential that the pool be managed by a skilled and highly proffessional broker.

Well, inspite of all the risks involved in futures it does carry certain strengths.

Strengths • Futures are extremely useful in reducing unwanted risk.• Futures markets are very active, so liquidating your contracts is usually easy.

Weaknesses• Commodity Futures are considered to be done with proffessionals only as it's one of the

riskiest investments in the financial markets .• The market volatilety makes it very easy to lose your original investment.• You must be very alert about the tax consequences as high amount of leverage can create

enormous capital gains and lossess.

Hope these commodity tips help you in trading commodity well and will surely drive profits to you.