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{Taking the Mystery out of Trading in the Commodities}
By plrprousers | January 27, 2009
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If we decide to invest in stock market indexes, or in individual stocks themselves, we find that we are really investing in ephemeral things or in bits of paper which take the place of a larger reality. We cannot just lift, a stock index. It exists purely in the observer’s mind or on graph paper or on the computer visual display. Conversely, when you or I invest in Commodities, we exert control over common items which we use daily – familiar household goods including rice, cocoa, sugar, beef, and cotton. There seems to be much more of a “personal touch” about it.
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A major difference between trading stocks (on the one hand)and the Commodities (on the other) is that stock and stock index trading is mostly driven by human psychology, while trading in Commodities is mostly driven by the ever-present law of supply and demand. The level of supply and demand, in turn, depends upon weather patterns, rainfall, carryover of last year’s harvest, amount of acreage planted, animal birthing levels, price of animal feed, historical slaughter rates, availability of labor and transportation,cost of fuel, variations in worldwide usage, and general economic conditions both at home and around the world.
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Because emotional input applies less to Commodities trading than it does to stock trading, it follows that it is possible to more accurately predict the future direction of Commodities prices. We can learn to interpret the patterns of the seesaw-like waves of prices and of certain Indicators that we read in conjunction with price data in order to be able to quite precisely predict the future direction of prices – especially in the immediate future, such as the very next day.
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Whether we believe that prices will go up – or go down – it doesn’t make any difference. We can wager either way. Of course, we would much rather make the correct choice !
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All of us have heard horror stories about a load of corn being unceremoniously abandoned at the trader’s front lawn. That might occur, but you’d really have to work at it. A little ordinary prudence should be sufficient to keep any reasonable person insulated from that risk. And, if you stick to purchasing options and avoid becoming involved in contracts, at least while you learn the business, it it would be impossible for it to happen. The beauty of buying options is that all of the cards are in your hand. When you put your money on the table, all of the cards belong to you. All the while,the absolute limit of your risk is the money which you paid when you acquired the option. You have the right, but not the obligation, to perform. The party who sold you the option has all of the risk.
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This is the really great aspect of Commodity trading: Even before you begin to fret about committing real dollars, you can reduce your risk of loss to zero by paper-trading for as long as you please while you learn the business. What an idea! Here’s the chance to learn something new, fascinating, and filled with profit potential without risking even a nickel.
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And, really, this is a hugely fascinating world. It is enormously satisfying to make a wager on the direction of the market price of a Commodity – even a paper bet! – and observe it go in the direction you wanted.
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You should not try this haphazardly. We know very well that prices really do move in waves; that those waves move in recognizable patterns; and that the patterns repeat themselves and are roughly predictable in size and direction over time. We do not merely stick a wet thumb in the wind and take a wild guess; we make our moves having at hand a basic understanding of Candlestick price formations and of the many Indicators which give us clues regarding the next probable direction of prices. So, it’s not guesswork by any means. This is a world of probabilities, not certainties, with knowledge of these tools right with us, guiding us to decisions which are sensible. It’s a consolidation of all of the evidence before the investment decision is made.
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Over a course of many years of trading, I have found that trading Commodities is actually an enjoyable intellectual exercise that, when it is done conservatively and smartly, can be a real moneymaker, at a risk level which is entirely controllable by the trader.
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http://www.CommoditiesJunction.com/
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