commodity markets
The Explosion of the FX Market
During the 1980’s and 1990’s, if investors wanted to really leverage their capital, and take on greater risk in hopes of a greater return, the futures and commodity markets were the place to go. Leverage in these markets was much higher than equity markets, and the potential for huge profits, and also huge losses, was much greater.
However, in the early 2000’s, the Foreign-Exchange (FX) Market exploded. Until the late 90’s and early 2000’s, only banks, large funds, and wealthy individuals could trade in the FX Market due to the very large minimum account size and minimum contract sizes. The explosion of the FX Market into the retail consumer space has changed all of that, though. Today, an investor can open an FX account with a broker for as little as a few hundred dollars. And they can use leverage that far dwarfs anything available in the futures or commodity markets. In fact, some brokers will actually allow customers to use leverage up to 400:1. This degree of leverage is extremely dangerous, which is why the National Futures Association (NFA) has cracked down with tough regulation, as they seek to cap leverage at 10:1. This has caused some investors to flock overseas where 200:1 leverage is still common.
Besides the high leverage available to traders, the FX Market possesses several key characteristics that set it apart from futures and commodity markets. First of all, the FX Market is not centralized—futures and commodity markets are. There are central exchanges located throughout the United States that make it fairly easy to track futures and commodity action. These exchanges are open 8 hours per day, 5 days per week. The FX Market does not have a centralized exchange. Instead, it is an Inter-Bank Market that is composed of banks and large financial institutions spread throughout the world. Due to this fact, the FX Market is a 24 Hour per day market. For those who trade forex, the trading day begins in Asia, then moves to Europe, and finally ends in the United States of America. Then, just as the U.S. trading day comes to an end, Asia begins once again. This continual flow of currency transpires worldwide from Sunday evening until markets close in America late Friday afternoon. This can be very beneficial for traders as they are not subject to unexpected news events that can happen after market hours. The market is always open and order can always be opened, closed, or modified.
Another characteristic of the FX Market that differs from commodity and futures markets is the cost of doing business. In the FX Market, there is no commission charged to the trader. Since the marketplace is completely electronic the costs of business tend to be much lower. Instead of charging a commission, most FX retail brokers fix their cost into the bid/ask spread. For example, if the EUR/USD is showing a 1 pip spread at market, if a trader executes a trade at market, they will paying the broker 1 pip. There is no commission on top of this. This can be slightly misleading at times, especially if the broker widens the spread considerably during news times, which is common in the FX retail space. A trader may see a 1 pip trade most of the time, but during a volatile news announcement the spread may widen to 15 or 20 pips.
A final key characteristic of the FX Market is the liquidity. The estimated daily turnover in the FX Market eclipses $3 trillion. That number is so staggering that it is impossible for any one, or even a handful, of market participants to drive currency prices for any extended period of time.
CBOT Futures Contracts Trading
Trade is buying and selling contracts for items we use everyday. Some of the items traded in the commodity markets are so common, all topics: soybean, cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feed, fruits, vegetables, grains, other beans, hay, other livestock, meats, poultry and eggs. Energy items that are traded on commodity markets include oil, natural gas, electricity and gasoline. The commodity speculators in the energy market were the cause of the recent price rise in the cost of gasoline at the pump. The purchase and sale of commodities is very similar to buying stocks and bonds in the stock market, but with much more risk. Since it is much more volatile, commodity trading is speculative, involves a high degree of risk, and is designed only for sophisticated investors who are able to withstand the loss of more than their entire investment. It is not for investors with a weak stomach! However, trade in commodities is a battle between return and risk. Due to the influence which you can achieve a higher rate of return of most other forms of investment, but at a higher risk.
The absolute lack of discipline is the biggest reason why traders not in the future option trading. As a result of a lack of discipline, emotions in the way and the result is a disaster. What is needed, is a system when it comes to trade CBOT futures. Trade with a system removes the emotions of the future option trading. If you do not have a strategy and try to make decisions when the market is moving, which are destined to become emotionally attached to positions. Usually what follows is the indecision and panic when the market goes your way, as you do not have an answer ready. That is when most traders lose their money at CBOT futures market. If you follow a system you’ll know what to do no matter what the market does. There are a few reasons that commodities are separated into different types. Above all these are in place to facilitate comparison of prices. These differences are also there for the convenience of trading as well as to facilitate their research. However, for almost every kinds of commodities out there, you will want to know some basics to get started. When it comes to which one is best for you, there are some options to consider.
Energy, the first on our list has been very active in recent times. This features different products that provide energy to heat homes and power as well as businesses. This includes oil, petroleum products, crude oil, heating oil, propane, natural gas and coal. In this section the type of goods is a minimum price to be fixed by the exchange. There is also a standard size, the amount covered by the futures contract. Grains, the next on the list of the types of grains. This includes wheat, oats, corn, rice and soybeans. It may also include a host of other miscellaneous products. The Chicago Board of Trade or CBOT is involved with this lot. These are usually sold as future trades. These types of commodities as a minimum, and also a standard contract size. Perishable, perishable include coffee, cocoa, sugar, cotton and orange juice. The most common exchange for these products is the Coffee, Sugar and Cocoa Exchange or CSCE. The reason that the oranges are not the types of trade is that eighty percent of them turn into frozen concentrated, so this is what is traded instead. Cotton trade in New York even has the name of frozen concentrated orange juice or FCOJ as one of the things that trade.
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