Day-trading commodity futures is a complicated investment strategy, but if you’re willing to perform the necessary due diligence it can be an extremely lucrative one. The first step to day-trading commodity futures successfully is understanding how they work.
Commodity futures are based on future delivery of actual goods, such as corn, silver, or gold. If an investor holds the futures contract when it expires, the goods will be delivered and the payment must be made. Typically, a seller of some good will make a contract with a buyer for future delivery of that good for a specific price. The buyer may transfer that contract to another buyer if the value of that good changes at any point, resulting in the commodity futures market.
The middle-men in these types of transactions are the traders. For the most part, they don’t have any real interest in actually receiving the goods guaranteed in the contract. They simply buy a contract for a commodity if they think the price for the good will increase or sell it if they believe it will decrease.
As an example, let’s say a farmer has an entire field of corn growing, but he’s worried that the market price for a bushel of corn will decrease before the harvest. In response to this, the farmer will write a contract to sell a specified number of bushels to a buyer at the current market price. This guarantees the farmer will be able to sell his corn for the current price and the prospective buyer will be getting a deal if the price increases.
If the price increases, the holder of the contract may decide to sell it for a profit to another individual on the commodity futures market. investors buy and sell these contracts to try and profit off the variations in price in much the same way that the stock market works. You buy if you think the price will increase and sell if you think the price will decrease.
Day-traders in the commodity futures market simply buy and sell many times throughout the day. This typically works well for goods where the price is more volatile and the good is heavily traded, like gold. Commodity futures day-traders play a crucial role in providing liquidity to the market and giving original sellers and final buyers a way to reduce their risk and exposure if commodity prices rise or fall excessively.