Yesterday

Back in the mid-1800s, the McCormick reaper was invented, greatly enhancing wheat production in America. At about the same time, Chicago was becoming a major commercial center. Wheat farmers from across the country were coming to Chicago to sell their wheat to grain dealers, who then sold it to commercial buyers all over the world.

At that time, Chicago had almost no place to store wheat and had poor methods for weighing and grading it. This left the farmer at the mercy of the grain dealers.

In 1848, a central exchange was formed where farmers and dealers could meet to deal with "spot" grain, which is selling wheat for cash and immediate delivery.

Soon after this, farmers and dealers began to deal in "futures contracts." This simply means that the farmer (seller) would contract with a dealer (buyer) to deliver wheat at a specific date in the future for a predetermined price. Hence, the name "futures" trading evolved.

This worked well for both parties, as the farmer knew in advance how much he was going to be paid in the future for his crop, and the buyer knew his future cost beforehand.

These contracts became so common that banks started to accept them as collateral for loans. Sometimes the farmer might not want to deliver the wheat and would sell his contract to another farmer, who would take on the obligation to deliver. Other times the dealer might not want to take delivery and would sell his contract to someone who wanted to take delivery. Before long, speculators, who saw an opportunity to buy and sell these contracts, hopefully at a profit, came into play. These were the first commodities "traders" as we know them today, and they had no intention of ever taking actual delivery of the wheat. They began trading these contracts among each other, hoping to buy low and sell high or sell high and buy low.

Today

Commodity trading is a business like any other and must be treated as such for success. However, if you are diligent in your studies and have the persistence and fortitude to learn what's needed, this can greatly contribute to your success as a trader.

Becoming wealthy in the commodities business is not uncommon. Many people have done it before, and many more will do it in the future. Even if you don't have a lot of money to start trading with, you can still be successful.

Richard Dennis, as an example, borrowed $1,600 and turned it into $200 million in about ten years. He didn't do it overnight and without tremendous effort. He studied, applied himself, made a plan, and followed his plan exactly. He started the team of traders you might have heard of called The Turtle Traders. I have a free "book" about the Turtle Traders at http://common-sense-commodities.thinkific.com/.

Millions of dollars have been lost by people who enter the commodities market without sufficient training with the idea of getting rich overnight. When they don't get rich, and even worse, lose all their money, they blame the commodities market itself. The person they should blame is themselves.

This accounts for some of the negative stigma associated with commodity trading. Many people see it only as a form of gambling. In some ways it is, but I think we can stack the odds in our favor.

Trading commodities is different than trading stocks. When you buy a stock or a piece of real estate, you actually own it. When you buy or sell a futures contract, you are speculating on the future direction of the price without ever really owning anything. You simply own the right to buy or sell the commodity, at or before a future delivery date, at a predetermined price.

As a speculator, this right to own is sold back to the market before delivery obligations are triggered. If you "buy," then you are considered "long," and are speculating that prices will rise. If you "sell," you would be "short" and speculating that prices will decline. In other words, you are trying to buy low and sell high or to sell high and buy low.

We will be discussing this in detail later. There are three positions in trading: long, short, and out. Most of the time the third position is the correct position, but it's not used often enough. To understand how you, a speculator, fit into the picture, let's look at a commodity from start to finish. N

ow, put your farmer hat on for a minute and hop on the plane to Wyoming. You're a wheat farmer now, and you planted your crop about three months ago. In a few months, it will be ready to harvest. After careful analysis, you figured out that it cost you about $4.00 a bushel to grow it, including paying for your entire overhead. Anything you can sell it for over $4.00 a bushel is profit for you.

Let's assume that right now, wheat is selling for $6.00 a bushel, but the price has been going down over the last few weeks. Since it's going to be three months before your crop is ready for harvest, what can you do to assure yourself a profit on your crop?

You are concerned that if the price continues to drop, in three months the price may be lower than $4.00 a bushel (as an example only), which is what it cost you to grow it. Now, what do you do? You sell a futures contract (or more than one) for $6.00 a bushel to be delivered three months from now, in December, as an example.

Of course, today with online trading, you don't have to call a broker to place a trade like I had to when I first started trading. You just do it yourself right on the chart in Track-n-Trade Live software or other online software you might be using.

Your risk in doing this is that if the price of wheat goes up to $7.50 a bushel during the next three months, you are going to get only $6.00 a bushel because you pre-sold it today for $6.00 a bushel. But, on the other hand, if the price of wheat drops below $6.00, you have locked in your price of getting $6.00 a bushel.

You feel this is a good way to go since the price of wheat has been going down, not up, in the last few months. Farmers call this process "hedging." You have probably heard that term before. Farmers use it all the time.

When you sold a contract(s) (also called "going short"), there is someone else that has to "buy" (also called "going long") your contract. Now, who would want to buy your wheat contract at $6.00 a bushel? It could be a large company, like Wonder Bread, who is buying wheat and is concerned that the price of wheat will go up, not down, three months from now, and they want to protect themselves in case of a price increase.

Of course, it could be a speculator who is looking to make a profit, like you or me. So you sold a contract to lock in your profits, the other person bought a contract to guarantee their price, and you paid the clearing firm a commission for doing this, and you slept a little better that night.

Also, in most markets, there are thousands or tens of thousands of trades placed every day. This gives the market liquidity.

Let's change hats again. You fly back home and put your speculator hat on. You carefully analyze your charts on wheat, and, yes indeed, the price has been dropping, but it looks like the price is going to stop dropping and start to go back up again due to say, a drought forecasted for The Ukraine, which grows a lot of wheat like the USA does. You think that in three months, it's going to be $7.50 a bushel, not the $6.00 a bushel that it's selling for today. (You will learn later how to analyze charts to get a good idea of where prices may head.)

You sense an opportunity to be able to buy a contract at today's price of $6.00 a bushel and sell it a few months later for $7.50 a bushel or more. If you are correct and the price goes up, you are making a profit on your commodities contract.

When you buy the contract at today's price of $6.00, you are guaranteed that price by the person who sold you the contract. They must honor their end of the agreement and sell it to you for $6.00 a bushel at the end of the contract, even if the price goes up to $7.50 or more a bushel. On the other hand, if the price of wheat goes down, you lose money.

How would you lose money? If the price of wheat three months from now is $5.00 a bushel and you agreed to sell it for $6.00 a bushel, you have lost $1.00 a bushel, for the total number of bushels in your futures contract, which in the case of wheat is 5,000 bushels. By the way, a $1.00 increase or decrease in Wheat in 90 days is a very big move.

The major difference between stocks and commodities is leverage. I'll show you what I mean. A contract in wheat is for 5,000 bushels. You don't actually buy or sell 5,000 bushels; you just control 5,000 bushels. You would put up a "deposit" with your clearing firm for the right to do this. In the case of wheat, that "deposit," which is also called your "margin," is only $1,375. So $1,375 controls one contract for 5,000 bushels of wheat.

If you had paid all cash rather than buying a futures contract, you would have to spend $6.00 X 5,000 bushels or $30,000. This is the power of leverage. With a futures contract, you still control 5,000 bushels, yet you only put up a deposit of $1,375 to do so. It's over 20-to-1 leverage in wheat.

Let's look at how much you would have made by paying cash for 5,000 bushels if the price went up. Bushels purchased: 5,000; Current Price: $6.00; Total Cash Paid: $30,000. If the price of wheat went up to $6.50 per bushel, you would make 50¢ per bushel, or $2,500 profit (5,000 x 50¢). An 8% return on your investment in just 3 months. Not bad.

Let's take a look at what your return would be if you had bought a futures contract (went long), rather than paying all cash. Remember the margin, or deposit, on a wheat contract that controls the same 5,000 bushels is just $1,375. If wheat did, in fact, go up to $6.50 a bushel and you sold it, you would, of course, still make 50¢ a bushel or $2,500.

The difference is that you made a 55% return (less commissions and fees of maybe $15.00) return in three months with the futures (because you only put up a deposit of $1,375) versus an 8% return for cash. That's what I call leverage! And of course, since you made money on the trade you get your TOTAL deposit, called margin, back also.

Anytime you have the potential of making a profit, you also incur the potential of taking a loss. Keep in mind that your potential loss is also leveraged. In the example above, if the price of wheat dropped 50¢, to $5.50, you would have lost $2,500 (50¢ a bushel X 5,000 bushels). Now for the good news! You can in many ways limit your losses. In other words, you can stack the odds in your favor. There are several ways to do this, and you will learn about them as you go through the course.

Tomorrow

Many people who trade commodities are average, hard-working people, probably a lot like you, who are just trying to supplement their income and trade on a part-time basis. Based on my experience, I'd bet that less than 5% of speculative traders are full-time.

There are basically two types of traders, although some people mix a little of both in their trading style. The fundamental trader, or a fundamentalist, is someone who studies the supply and demand of a given commodity. They look at things like weather patterns around the world, droughts, or floods, for example, that would affect the world's supply of a commodity like wheat. Remember that commodities are a worldwide market, not just here in the USA.

As a fundamentalist, you might buy a wheat contract because you think there is going to be a drought this summer in Russia, causing the price of wheat to go up because the supply will be down.

The technical trader, or a technician, bases his decisions on current and past market trends that are reflected on charts. Let's say that you are looking at a chart and you see that the price of wheat is the lowest that it has been in 20 years. Based on that and other technical indicators, you might "go long" on a futures contract in wheat, thinking that the price is going up.

In this course, you are going to learn about technical trading as well as how seasonal patterns can be used to add to your potential profits. One of the advantages of being a technical trader is that you don't have to become an expert in the fundamentals of the underlying commodity. Technical trading is trading based upon technical information found on the charts.

Let's say that you wanted to trade Cocoa. As a technical analyst, you don't have to know anything about where Cocoa comes from, weather conditions, etc. That's why I like to teach people to trade using technical analysis.

When you are ready to trade, you can open an account with as little as $5,000. Don't expect to make much with a $5,000 account position trading, but you can certainly make a trade or two, maybe more, a month with this size account. I always recommend that you never start with more than $50,000, no matter how much money you have unless your name is Bill Gates. The reason is that if you can't learn to make money with $50,000, then you probably won't make it with $500,000 either.

If you are doing well and want to add to your account later, you can do that, but learn to crawl before you walk, and walk before you run. Take it easy! Learning to trade is a marathon, not a sprint.

Also, before investing any real money, you must learn to paper-trade. This is how you practice and learn to trade. If you can't make money "on paper using a demo account," you can't make it with real money either. Also, don't invest more than you can afford to lose, and assume you will lose it all. If you can't live with that thought, then don't trade.

You might find this hard to believe, but when you first start trading, you'll probably spend less than 30 minutes a day, maybe an hour, on your trades. If you are trading on a full-time basis, you will spend two or three hours a day, more on some days and less on others. Until you start to paper-trade, you won't understand just how little time it really takes.

You might be wondering what kind of equipment and supplies you need. How about a computer, an Internet connection, and some trading software? That's all you really need. I've already given you a link to Track-n-Trade software that I have used now for almost 20 years at the time of this writing. In case you missed it, here it is again, and remember you can get a two-week free trial, and no credit card is needed.

Track-n-Trade

In this course, you will learn dozens of techniques to interpret charts. Once you learn to do this correctly, you could make a comfortable living trading in the commodities market. Some may even do much better.

You must learn to limit your risk to a level that is within your own comfort zone. You will be able to use several techniques to do this. Learning to control risk is equally, if not more, important than learning how to make profits.

Knowing when to take profits is key to making money in this business. If you don't know when to take profits, you can end up giving back everything you make. Even more important than taking profits is knowing how to control your losses.

You also will learn some powerful techniques to do this. Again, I want to stress that you must first learn to paper-trade. Track-n-Trade gives you a $50,000 demo account when you first try it so you can "paper-trade on a live software platform. You can practice trading "on paper" without risking a penny.

You can paper-trade for weeks or months if you like. After you feel confident that you know what you are doing, and are consistently making money on paper, then, and only then, should you put real money in the market. Trust me on this, as I speak from experience! I won't sugarcoat anything, and I'll tell you right now that you can lose your shirt, your pants, your socks, and your shoes, and no one but you will care. Well, maybe your spouse might!

You'll also gain a good understanding of how to trade by the time you finish this course. As a matter of fact, I think you'll know more than many people who have been trading for years after you finish this course! I hope this course is just the beginning for you. Every day you trade, you'll learn a little more. You will also want to read a few good books from time to time.

There is a lesson later in this course that contains a list of books that I feel will help you increase your understanding and supplement what you learn in this course.