A spread trader always wants the long side of the spread to increase in value relative to the short side. Dozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. It also covers important considerations, how to evaluate futures and a basic example of a futures trade — taking a step-by-step look at instrument selection, market analysis and trade execution. Futures contracts were originally designed to allow farmers to hedge against changes in the prices of their crops between planting and when they could be harvested and brought to market. Commodity spread betting is a way to speculate on price movements of various commodities.
Commodity Trading Strategies There are many different strategies you can use when trading commodities. Learn which strategies make the most sense for you.
You could trade an intermarket spread, for example, by simultaneously buying hard red winter wheat and selling soft red winter wheat or vice versa, depending on market conditions. These are also called inter-commodity spreads. This is any type of spread in which each position is created in a different futures exchange. Strategies By Investopedia Share. A Brief History Futures Fundamentals: The Players Futures Fundamentals: How To Trade Futures Fundamentals: Long and Short Trades Trades can be entered in two different directions, depending on where you expect the market to go.
There are several different types of spreads, including: Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions. CFD versus Spread Betting investment products, which offer significant market exposure with a small initial deposit. Commodity spread betting is a way to speculate on price movements of various commodities. The price is figured by subtracting the back month from the front month.
For a more in-depth explanation, please visit our Introduction to Spread Trading page. Commodity futures spreads are a lower risk approach to trading commodity futures that can be utilized by traders of all levels of experience.
Commodity futures spreads are less sensitive to market moves than a pure commodity future position, and can provide a more conservative addition to an existing futures trading portfolio.
We are going to delve in detail into commodity futures spreads and explain a range of key commodity spread trading strategies that traders can utilize to effectively trade the commodity futures market.
A market is regarded as being in Contango when the value of the forward contract is higher than its spot price or the price of a contract expiring in an earlier month is lower than the price of a contract expiring in a latter month yielding in an upward sloping curve.
A market is in backwardation when the value of the forward contract is lower than its spot price or the price of a contract expiring in an earlier month is higher than the price of a contract expiring in a latter month generating an inverted sloping curve. This is because the nearer months are up for delivery earlier while prices are high because of demand supply imbalances, with the expectation that these conditions will ease closer to the latter delivery months.
For example, let us say in February , a March corn contract is priced higher than a December contract. In commodity futures contracts, near months react more quickly and by a larger quantum than farther months, in a bull market therefore, the prices of nearer month contracts will rise faster and further than a latter month contract.
In such markets, a bull futures spread is a common strategy employed by traders. Here a trader would look to buy a nearer future contract and sell one further out, in the same market. For example, assume a trader has the view that due to expected winter storms, the price of Heating Oil for January will be higher than the price of the forward May contract. Based again on the premise that nearer contracts react quicker and farther than later contracts, in a bear market price of nearer month contracts will fall faster and by a larger amount than those further out.
In this scenario a bear futures spread strategy would be utilized by selling a nearer futures contract and buying one further out, in the same market. For example, assume a trader has the view that an increase in supply of Soybean is expected to come into the market in September, putting pressure on the price of the upcoming month futures contract.
The trader can then sell the Soybean September contract and buy the Soybean December contract to create the spread. Many commodities tend to be cyclical, meaning there are expected periods in the year where the commodity is expected to trade higher, and times that the same commodity usually trades lower. The risk of loss exists in futures and options trading. Trading futures and options involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future results and the risk of loss does exist in futures trading. All trading rates quoted per side. Applicable exchange, regulatory, and brokerage fees apply to rates shown. Please email webmaster unitedfutures. Open An Account Now Online!
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Commodity trading strategies are plans for buying and selling commodity futures and options to profit from movements in price. It is important to construct a strategic plan before you begin trading commodities and risk any capital. Watching the financial news and reading a commodity . Futures traders try to predict what the value of an underlying index or commodity will be at some point in the future. Speculators in the futures market can use different strategies to take. Trading system technology advanced quickly in the late s and early s, establishing paradigms that persist today. Here’s a look at where we stand — and where we might go. 10 rules.