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Do You Have Commodities Insight?

written by: Varun Walia•edited by: Jason C. Chavis•updated: 6/29/2011

This article starts by explaining the very basics in how to trade in commodities market securities - choosing the right commodity, and then continues to provide very useful insights of commodity trading in conducting commodity research, short-selling commodities and trading in seasonal commodities.

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    How to choose the right commodity for trading?

    There are a whole host of commodities that trade with good volumes, but it’s really crucial to first identify the best commodity that fits to a trader’s profile. Well, it’s not all that tough, as every individual learns from exposure, through varied day-to-day activities, and in the process he gains insight on many commodities. Generally, people keep a track of gold, silver, oil, gas, sugar and many other commodities that influence their daily life or those they are simply curious about. Having a general insight, if not in-depth knowledge of a particular commodity, also helps while trading as the individual is aware of possible scenarios that he might have to face. So, simply think, and make a list of commodities, you know most about. But remember, all commodities have margin limits, so final decision should be based on your affordability. In general, learning how to trade in commodities market securities can be challenging and rewarding.

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    How to gain more insight on the chosen commodity?

    There is no need to carry out an intensive research, as all you need is sufficient information to make sound trade decisions. The best way to begin is to scroll through online research reports that carry in-dept analysis conducted by a professional commodity’s expert. Then, one can subscribe to commodity market newsletter, but make sure to sign-up with a reliable website. When chasing a particular commodity, you should consider giving a look at that commodity’s profile page, including charts, historical pricing, analysts’ views and most importantly latest news. While trading, it’s really helpful to follow the headlines especially before market opens and then at the closing bell.

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    How to trade a seasonal produce?

    Commodity trading becomes trickier, if the one you are dealing with is a seasonal produce. Such commodities need to be traded with utmost caution as each year different demand and supply balances lead to unpredictable price trends. However, if you have the insight to understand demand and supply variables for the commodity you love to trade then simply go long or short depending on the strong or weak produce and the demand on the sidelines. But, never take the price trends granted for each season, as this is the most common mistake traders make in seasonal commodities.

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    How to carry the selling approach in commodities?

    Just like stock markets, you don’t need to own a commodity in order to sell. If your favourite commodity play is all surrounded with negative news flow and even you expect the prices to fall, then don’t just wait for the fall, go ahead with a short-sell. The process is similar to that of buying a commodity as you can create a short by selling a future contract. However, a proper exit should be planned ahead of dealing in future contracts as margin limits are easily hit when utilizing too much leverage.

    Professional commodity traders typically don’t have a bias toward buying or selling. They will sell if they feel a market will move lower and buy if they feel it will move higher. The procedures to buy and sell have the same ease, so it is smart to look for opportunities in both directions.

    Prices trade both ways, so one should not be wary about selling or buying.