HomeWhen we invest in stock indexes, or in stocks themselves, we are investing in ephemeral things or in pieces of paper that represent something else. We can't very well touch, pick up, or taste a stock index. It exists only in the mind or on graph paper or on our computer screen. However, when we invest in Commodities, we are dealing with control over things we use every day ' staples such as wheat, corn, coffee, sugar, beef, and cotton. There is something much more 'personal' about it.
One major difference between trading stock indexes or stocks (on the one hand) and the Commodities (on the other) is that stock and stock index trading is largely driven by emotion, while trading in Commodities is mostly driven by the law of supply and demand. This, in turn, depends upon weather patterns, rainfall, carryover of last year's harvest, amount of acreage planted, animal fertility levels, availability of labor and transportation, variations in worldwide usage, and general economic conditions.
Since emotional (or psychological) input has much less applicability to Commodities trading than it does to stock trading, it follows that we can more accurately predict the future course of Commodities prices. We can learn to interpret the patterns of the up-and-down waves of prices and of certain Indicators which we read together with price information in order to quite closely forecast what prices will do in the future ' especially in the immediate future, such as tomorrow morning.
Whether we think prices will go up ' or go down ' doesn't make any difference. We can place our bet either way.
All of us have heard horror stories about a load of wheat being unceremoniously dumped in the trader's front yard. That could happen, but you'd really have to work at it. A little common sense and attention should serve to keep you away from that risk. And, if you stick to buying options and avoid getting involved in contracts, at least while you learn the business, it could never happen. The beauty of buying options is that you hold all the cards. You put your money on the table and all the cards are yours. At the same time, the absolute limit of your risk is the amount which you paid for the option. You have the right, but not the obligation, to perform. The party who has sold you the option has all of the risk.
Here's the really great aspect of Commodity trading: Even before you begin to think about committing real dollars, you can reduce your investment risk to zero by paper-trading to your heart's content while you learn the ropes. What a concept! Learn something new and fascinating without risking even a nickel.
And, truly, this is a fascinating world. It is immensely satisfying to place a bet on the direction of a Commodity's price ' even a paper bet! ' and have it go your way.
This should not be done haphazardly. We know that prices move in waves; that the waves move in patterns; and that the patterns are repetitive and roughly predictable in size and direction as time progresses. We do not simply stick a wet thumb in the air and guess at it; we make our moves with a basic understanding of Candlestick price patterns and of the various Indicators which throw off clues regarding the next likely direction of prices. So, it's not guesswork at all. We deal in probabilities, with knowledge of these helping hands right there in the forefront guiding us to decisions that make sense. It's a gathering-in of all of the evidence before the investment decision is made.
Over many years, I have found that trading Commodities is truly an enjoyable intellectual exercise that, when done conservatively and smartly, can be a real moneymaker, at a level or risk which is strictly controllable by the trader.
About the Author:
The author is an experienced commodity trader, a retired corporate CEO, retired attorney,and has passed the NASD Series 65 Investment Adviser exam. He is the creator of the "Candelaabra" technical analysis system for use in all financial markets, and publishes his three-times-per-week free Investment Newsletter at http://www.candlewave.com and his daily Commodities Report at http://www.CommoditiesJunction.com
