Most of us know what Forex is all about and a good few of us have either won or lost fortunes or are at least somewhere in between at the moment, but a lot less is known about commodity trading, which is strange, because commodities are the bases of all stock exchanges. When farmers and manufacturers no longer took their produce to market, they instead took their lists of stock and gave certificates of ownership to buyers who parted with money for the produce listed. Those certificates of ownership were in-turn traded for a profit (or loss) and that is how a stock exchange works at its most basic level. So why then, do so many myths exist about the way a stock exchange; and in particular trading commodities on an exchange circulate?
Big Losses on Commodity Trades
Okay, so there have been some major losses in commodity markets, but that is because traders are often allowed large amounts of leverage based on the fact that the commodity is not going anywhere and should have a more static value unlike a currency pair that drop like the proverbial lead weight as a result of a political gaff. Leverage is what you get when you place a portion of the necessary amount upfront for a trade and are allowed to settle the difference either at the end of the day’s trading or when your trade is complete.
Commodities are High Risk
It’s true that a novice should think long and hard before they risk everything on commodity trading, but if there was only losses to be made on commodities, we would all be selling short and making a profit. Like any trade, due diligence is the most important part of the process. Fail to do your research and you might as well just give your money away. Act on real information that is fresh and has not moved the market you will make money, but then isn’t that what everyone is trying to do? The facts are that people expecting easy trades with quick returns are better off picking a few trading pairs and spending a few hours juggling their lots. Watching Eddie Murphy in Trading Places does not make you a prime candidate for trader of the year.
How Much is Gambling and How Much is Knowledge
The truth is that knowledge is power, but even with all the knowledge and due diligence in the world, you can still lose on trades because every trade is a gamble. The more knowledge you possess, the better your odds, but it is always a gamble. Take the recent drop in Gold (Time of writing – June 15, 2013) Gold has been a sure winner for everyone going long (betting on gold value increasing) for the last few years, but 2013 has been a bad year for many and lots of people are talking about a global sell-off that will see gold crash like a Zeppelin with flames and all.
There is just no sure fire way to make money trading anything on any Index, but you can be sure that Gold will recover at some point, but you may have your money tied up for years if you buy now. Alternatively, you could go short and bank on people selling off their investments in Gold and make a nice turn of profit that way. Selling short is like betting on the value of Gold dropping. There is no guarantee, but one thing you will learn about commodity trading is that swarm mentality rules and just like forex, you need to catch the wave at the peak or trough depending on whether you are going short or long.
Kay Brown is a former financial adviser who sold medium to long-term investments in mutual funds and unit trusts, but now considers herself to be the complete trader.
- Image courtesy: License All rights reserved by Sajid Pervaiz Fazal