So here’s the question: If futures trading is so risky, why do I and so many others choose to take that risk? The answer is simple: Money. Trading commodity futures may be risky, but there is potential for enormous profit. Some of the world’s greatest fortunes have been built around commodities:

• Banking patriarch Mayer Rothschild amassed a fortune during the Napoleonic Wars by hoarding and distributing gold bullion to fund the British.
• John D. Rockefeller, Sr., in his day, the richest man in America, built his impressive fortune on oil, forever changing the global oil industry through creation of the Standard Oil Company.
• Self-made steel magnate Andrew Carnegie consolidated the American steel industry, founding the company that would eventually became behemoth U.S. Steel and in the process accumulating a fortune second only to Rockefeller’s.
• Abdel-Aziz Al-Saud, the first king of Saudi Arabia, created a nation and amassed unbelievable personal wealth through consolidation and control of crude oil and natural gas.
• Lakshmi Mittal, the Indian steel magnate, used his knowledge of the steel industry to become the fourth wealthiest person in the world in 2004.
• In 2005, legendary oil man T. Boone Pickens made a cool $1.4 billion betting on the price of oil and natural gas.

Most of us who trade commodity futures will never reach the storied peaks of the world’s legendary commodity kings, but there are plenty of commodity traders who have made a very nice pile through steady trading. There is plenty of “gold” to be found trading futures on the commodity markets. All you need to do to build your own fortune is to consistently make more than you lose.

With the right system, the right signals, the right tools, the right attitude and some patience and persistence, you can “win” as a futures trader. I’ve already done it and I can show you how. If you want to learn the skills you need to succeed as a futures trader, click the link for complete information on my Futures Secrets Trading System. Read testimonials from satisfied clients, now successful futures traders themselves. Click here for details on Futures Trading Secrets.

• Agricultural products. We use agricultural products to feed and clothe ourselves.
• Metals. We use metals to build tools and weapons to improve our existence and protect ourselves.
• Energy. We use energy — coal, gas, oil, etc. — to warm our homes and power our factories.

The history of commodities parallels the history of mankind and development of civilization. Man’s survival and development are tied to his ability to harness natural resources. Throughout history, civilizations and nations have thrived or perished based on their ability to cultivate agricultural products, develop metals and harness energy. In fact, the early ages of man — the stone age, the bronze age, the iron age — are defined by man’s ability to utilize increasingly complex natural materials to make tools and weapons. Survival depended on man’s ability to process increasingly complex metals in order to compete against and/or trade with his neighbors.

Nations have been founded and civilizations destroyed over the control of natural resources. In 1524, Francisco Pizarro’s Spanish conquistadors destroyed the entire Inca civilization in a vicious campaign to corner the South American gold market. In the late 1800’s, the British fought the bloody Boer War over control of South Africa’s gold and diamonds. The Persian Gulf War precipitated by Iraq’s invasion of Kuwait was essentially fought to stabilize global oil markets. Global economists and environmentalists predict that the world’s next great war will be fought over control of essential natural resources — water and arable land — made scare by the effects of global warming.

Throughout history, the fate and wealth of nations has been dictated by the presence and control of natural resources. This will not change and presents opportunities from which savvy futures traders can profit.

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Because of the essential nature of commodities, in times of war and great turmoil, investors cling to commodities. For example, after the tragic events of 9/11, gold prices spiked as investors sought safety in the precious metal. Tragedy sends investors running to the basic, the dependable, the necessary, the things that are essential in our lives — to commodities. In times of trouble, investors consider certain commodities (particularly precious metals) to be safe havens for their money. It’s the end of the world scenario: In a devastated world without structure or law, gold will always have value. People will always be able to exchange gold for the things they need. Perhaps today the idea seems a little too Hollywood, but it persists, rooted in ancient human history throughout which gold has always signified wealth and power.

Inflation is another economic force that sends investors scurrying to buy up commodities. In uncertain times, people will always need the raw materials on which society is built and which are used to provide man’s basic needs — food, housing, clothing, transportation. While other sectors of the market languish as inflation rises, commodities will flourish. Gold, in particular, spikes during times of inflation. Because gold is the standard on which the world’s currency values are set, investors see gold as the ultimate hedge against inflation.

Commodities will not necessarily follow the stock market during times of economic pressure. Generally, commodities do well in periods of late expansion and early recession. As the economy slows, interest rates drop in an effort to stimulate the economy (witness the Fed’s slow but steady drop in interest rates over the summer and into the fall in response to the home mortgage and credit crisis). Low interest rates spur commodity growth.

It is important to remember that business cycles are not exact and cannot be predicted with definite accuracy. But they do provide a historical perspective that futures traders can use to evaluate commodities markets. It is also important to realize that not all commodities follow the same cycle (wheat may peak in the spring; oil, in summer). At any particular time, however, futures traders can usually find rising and falling commodities from which they can profit. Understanding what drives the economy and how those forces impact commodities gives futures traders important information they can use to take advantage of and profit from movement in the commodities markets.

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1. Self-confidence
2. Discipline
3. Ability to handle loss
4. Profitable trading system

Self-confidence. If you aren’t confident that you can become a successful futures trader, you might as well pack it in now and save yourself a lot of grief. Successful futures traders are bold, aggressive and self-assured. They do not lose faith in themselves when they lose. They have the courage and self-confidence to keep trading. Futures traders are risk takers. We are the Mario Andrettis of Wall Street.

Discipline. If you cannot maintain self-discipline, if you let emotion rule your decisions, take your money and run before you lose it. Successful futures traders are highly disciplined, consistent and rational. They do not allow themselves to be distracted by extraneous information. They have the ability to dispassionately evaluate their system, knowing when to stick with it and when to change what isn’t working. Futures traders are cool and collected. We are the James Bonds of Wall Street.
Ability to handle loss. If you can’t handle loss, if you are easily frustrated by loss, or if you can’t afford to lose, get out before you gamble away the mortgage money. As a futures trader, particularly in the beginning as you hone your system and skills, you will lose. Successful futures traders are not flustered by loss. They do not panic when they lose. They do not abandon their system at the first sign of loss. In futures trading, the nature of the beast is that sometimes you lose. Futures traders learn from their mistakes, build on the lessons loss teaches, remain confident in the face of loss and work to keep their losses small so that, overall, they win. Futures traders are not defeated by loss. We are the Lance Armstrongs of Wall Street.

Profitable trading system. If you don’t have a trading system that has proven to be consistent and profitable, no amount of ability is going to make you a successful futures trader. You must have an effective conduit for that ability in order to succeed as a futures trader. An effective trading system is essential to your success as a futures trader. Futures traders are only as good as they system. For complete information on my Futures Secrets Trading System, click the link. Read testimonials from satisfied clients, now successful futures traders themselves. Find out how my Futures Secretes Trading System course can teach you how to pull the trigger. Click here for details on Futures Trading Secrets.

Futures traders usually calculate and chart several moving averages of various time variations (5-day, 20-day, etc.) for use as indicators. Short-term moving averages are more sensitive to price change, but early signals may proof to be false. Long-term moving averages respond more slowly, but there is the danger of missing the trend by waiting too long. By comparing short, medium and long-term moving averages, futures traders can spot probable trend changes. The challenge is to determine the combination of time variations that will create that optimum balance that results in reliable indicators.

Watch your moving averages for these signals:

• When a faster average crosses above a slower average, buy.
• When a faster average crosses below a slower average, sell.
• When the daily close is below either moving average, offset long positions.
• When the daily closes is above either moving average, offset short positions.

One important caveat about using published moving averages for information or comparison: You cannot assume that the market will behave today the way it did yesterday!

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A simple moving average is the average of a series of closing prices over a set period of time. For example, to determine a 3-day moving average of a commodity, the closing prices for three consecutive days are added together and divided by 3. A 20-day moving average would add the closing prices for 20 days and divide by 20. The “moving” is created by re-adding and re-dividing each day. In recalculating, the earliest closing price is dropped and the newest closing price is added before the figures are averaged. In our example, you are always averaging 3 prices for the three most recent consecutive days; however, those days are progressing in time through the month; therefore, the average is “moving.”

Because they use information that has already taken place, moving averages are “lagging” indicators. They are also “trend following” indicators that are most useful in trending price patterns in which an uptrend or downtrend is firmly entrenched. Moving averages often serve as both support and resistance points.When graphed, horizontal, or “flatline” moving averages have no predictive value.

The most common moving averages, those touted on the financial networks are 20-, 40-, 50-, and 200-day averages. Also effective are 10-, 30- and 100-day averages. Some traders create their own moving averages at intervals that appeal to them: 12, 18, 21, etc. days. Determine the time periods you believe will be most effective and stick with them. As a rule of thumb, limit your charts to no more than 4 or 5 moving averages per chart to avoid confusion.

Day traders often use shorter moving averages based on Fibonacci numbers, such as 5, 8, 13, 21 or 34.  These moving averages, especially if they are exponential moving averages (EMAs) can be very effective on short time frames.

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• In an uptrend, as prices rise, the closing price rises to the top of the recent price range.
• In a downtrend, as prices fall, the closing price drops to the bottom of the recent price range.

In charting, the stochastic oscillator uses two lines to give a single signal. The major line (%K) is usually depicted as a solid line. The second line (%D) is often depicted as a dotted line and represents a 3-day moving average of %K. Futures traders watch the %D line closely for major trading signals. When %D crosses %K, the intersection of the two lines indicate buy/sell points. Use the following rule of thumb to read stochastics signals:

• When both the %K and %D lines are below 20 and the faster %K line crosses above the slower %D line, BUY.
• When both lines are above 80 and the %K line crosses under the %D line, SELL.

The two lines rise and fall in tandem between 0 and 100. Readings above 80 are overbought; those below 20 are oversold. Savvy futures traders will watch for divergences which can indicate coming price trends over the next few time periods.

Futures traders value stochastics for its accurate findings. Easily understood, even by novice traders, stochastics provide valuable indicators for making good entry and exit decisions.

Scalpers. Scalpers seek immediate gratification. They look for short-term market movements seeking to shave money off the bid/ask price spread. Holding each position for only a  very short period of time (often only minutes) to minimize risk, scalpers make small gains through rapid trading.

• Money-making  strategy: To realize a large gain by the end of the day from the accumulation of many small gains.
• Most productive market environment: Wide-channel, heavy-volume, trending or oscillating markets.
• In their trading tool box: 1- and 3-minute moving averages and stochastics charts.

Swing traders. Swing traders are more dispassionate. Fundamentalists at heart, swing traders track price trends and patterns and other quantitative data looking for short-term price momentum. They act quickly to exploit such short-term price movements, looking for gains that can be made in one to four days. Swing traders sometimes mitigate risk by trading in smaller quantities.

• Money-making strategy: To gain from short-term changes in price movements that occur over one to four days.
• Most productive market environment: Tight-channel, light-volume and trending markets.
• In their trading tool box: 13- and 60-minute moving averages and stochastics charts.

Combination traders. Quick reflexes and flexibility characterize combination traders. They are able to gauge the market and respond quickly to the existing environment.

To become a successful futures trader, you have to figure out which trading style suits your personality and talents. If you’re quick on your feet, have the ability to look at the indicators and make snap decisions, and can be satisfied with small wins, you could thrive as a scalper. If you prefer a more measured approach to trading, like to back your decisions up with data, and have the patience to wait for the right moment, swing trading could be your milieu. If you can live in both worlds, you’re a combination trader. Each trading style has its advantages and can be quite profitable. The trick is to figure out in which environment YOU can be most profitable.

Futures traders are players and the game they play is fast paced. To succeed as a futures trader you must have self confidence, discipline, patience and quick reflexes. You need those quick reflexes to keep track of the many variables that affect the futures markets and, therefore, influence your buy/sell decisions. Among the more important variables you must track are:

• Underlying asset. A futures contract is based on an underlying asset. Most often assets are physical commodities. As we’ve discussed in recent posts, commodities are natural resources, so the underlying asset could be crude oil, soy beans, gold, sugar, etc. However, futures contract can be used to trade all sorts of assets, such as interest rates, indexes, currencies, equities, even the weather! Different commodities are traded on different exchanges. For example, the Intercontinental Exchange (ICE) trades crude oil, electricity and natural gas while the Chicago Board of Trade (CBOT) trades corn, ethanol, gold, oats, rice, silver, soybeans and wheat. Before you trade, be clear about the asset you want to trade and, particularly, about the exchange you want to trade on. Some assets are traded on more than one exchange. For example, wheat is traded on CBOT, the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE).
• Underlying quantity. The contract size, or trading unit, specifies the amount of the underlying asset covered by the contract. Futures contracts are highly standardized and specific to each exchange.  For ease of trading, the size of one futures contract is predetermined and fixed by each exchange. For example, one futures contract of frozen pork bellies traded on the CME equals 40,000 pounds of pork. One futures contract of light sweet crude oil on the NYMEX equals 1000 US barrels, or 42,000 gallons. Before you purchase a futures contract, make sure you know the exact amount of the underlying asset represented by the contract. Due to the influx of individual investors into the futures markets, many exchanges offer smaller sized contracts — minis. For example, one futures contract for light sweet crude oil traded on the NYMEX miNY is 500 barrels, half the quantity and, therefore, half the price of a traditional contract. For this very reason, I recommend trading the e-minis.

Next time, we’ll talk about more of the variables futures traders have to juggle as they make trading decisions.

• Commodities are a class of assets that includes energy, metals, agricultural products, natural gas and oil, and other natural resources. Commodities are natural resources, actual physical objects with an inherent value of their own.
• Futures are investment vehicles through which you invest in commodities. Futures can also be used to invest in other asset classes such as currencies, bonds, interest rates, stocks, indexes, etc. Futures have no value in and of themselves. They are known as derivatives because they derive (or take) their value from the underlying financial instrument (i.e., the commodity, currency, stock, etc.)

We use futures to invest in or trade commodities. In a futures contract, two parties agree to buy and sell the underlying asset (i.e., a physical commodity such as corn, wheat, oil, etc.) at a mutually agreed price at a specific time in the future. Most futures traders never intend to take physical possession of the commodity they are trading. In fact, of the billions of futures contracts traded on commodity futures exchanges every year, somewhat less than 2% result in the physical delivery of a commodity. Futures traders trade contracts back and forth to hedge or speculate on the price movement of the particular commodity that is the underlying asset of the futures contract. Their goal is not to own the commodity, but to make money on changes in the price of the contracts they are buying and selling.