Commodity Trading Colorado

As an example, lets examine a transaction between a wheat farmer and a large baking company that needs massive quantities of wheat. Before a crop is even planted, both buyer and seller are predicting and anticipating any rise or fall in the market, speculating on any factors that might drive prices up and down. The wheat farmer, worried that prices are going to drop, will make an agreement with the baker to sell the upcoming crop of wheat at exactly the current price (say, $3.00 a pound); and the baker, hopeful that wheat prices will go up, will agree. This means that in six months when the crop is ready to sell, the transaction will occur at exactly $3.00 a pound; so if the market price has dropped to $2.00, the farmer made a secure profit, while if it has risen to $4.00 the baker wins out.

This is the gist of commodity trading: educated guesses as to the future of the market for any given product or commodity. Predictably enough, the commodity trading market has gained a reputation for high-risk investments alongside its reputation for high-potential gains; those who trade and invest wisely, however, are those who take the time to evaluate both product and market, rather than making rash gut decisions or impulse decisions paralleling the use of a giant economic slot machine for business. With good judgment and discernment, commodity trading can be both rewarding and profitable – like any business, it just takes time and thought.

No pain, no gain, the saying goes, and it can easily be applied to the hazards of trading. Perhaps that should be adjusted to say no risk, no return, as the difficulties involved in investment almost always relate to the balance of risk and the potential returns. Because Commodity trading does have the potential to make the investor a much larger profit than his initial investment, the “return” is very high – but then, so are the risks.

The truth is that no matter how many trained economists there are studiously examining market trends and the state of world trade, no one can ever successfully predict the future of the market all the time. Some are better than others, and others are less reliable, but with commodity trading, there is no insurance; you can never know for sure if your money will return inflated or depleted.

Bruce Babcock, owner of Reality Based Trading Company, makes the following analogy concerning commodity trading. “Think of yourself walking into a gambling casino in Las Vegas or Atlantic City. You decide to play roulette. The table has a $5 minimum bet and a $5,000 limit, which happens to be your total bankroll. If you place a $5,000 bet on red, you should not be surprised if you immediately lost your $5,000. On the other hand, if you made only $5 bets, you could play for a long time and probably not lose very much at all.”

This comparison is as applicable as it is understandable – in commodity trading, your risks will relate to your returns. Investments of a few hundred dollars can be made over and over with only the risk of a few hundred dollars, while a seventy thousand dollar trade is a seventy thousand dollar risk. Of course, the returns are comparable as well – a hundred dollar investment may garner a fifty or even seventy-five dollar return, but a seventy thousand dollar return could nearly double, turning itself into a hundred and twenty thousand dollars – if, of course, your instinct proves correct.

Most people are more than a little shy of taking such risks, although a few are so drawn to it that they do it over and over again whether they make a profit or not. There are, however, alternatives to the skydiving lottery-card trading done by so many. The most notable of these options is the mentality of running your trading like a business, with similar attitudes towards investments, returns, risks, and evaluations. A business does not generally make a huge rash decision such as buying a dozen suckling pigs to raise in the back of a coffee shop; rather, a successful business will examine itself, its customers, and its needs, and buy and sell accordingly.

The gambling analogy is again useful here, as we consider the actions of a profitable business. If a successful business, say a sandwich shop, has $3,000 dollars to invest in itself, it is not likely to shoot the entire wad on the newest expensive brands of olives or salami. Commodity Trading is not about staking every penny on a hopeful product and praying that every customer will be dying for the taste of new Olivia’s Marinated Olives; a wise commodity trader spreads his assets throughout a number of promising ventures, out of which at least one is likely to pay off.