Tips for How to Trade Commodities

Investment opportunities abound for those with a little extra cash in their pockets who are looking to maximize their incomes. Young investors who are making a lot of money while keeping down expenses have the pick of the litter and lesser-known opportunities, such as commodities trading, are an avenue to increasing profits through speculative measures.

Hit the Right Direction

Commodities trading is a futures-based market, which means that you are betting on which direction you think the market is headed. It is considered a "speculative market" because all trading is based on speculation -- you simply can't know what will happen. The bright side is that there are only two directions -- up or down. When trading, don't focus on actual prices; rather, try to detect in what direction the market is moving.

Diversify Your Holdings

While diversifying your holdings is a truism for any form of investment, it is particularly applicable to commodities trading, where anything can go wrong. The great draw to this type of market is the potential for huge profits. Along with this benefit comes the same sized risk for huge losses. Instead of trying to claim all the profits and losing big, aim to diversify. Having a hand in several, different instruments allows you aim for high profits while mitigating risk.

Trade ETF's Instead

You can trade the commodities market without actually trading commodities. There are instruments called exchange-traded commodities, or ETF's, that act like mutual funds for the commodities market. They are composites of several commodities and move along with the commodities markets in generally the same way the Standard and Poors 500 Index moves along with the New York Stock Exchange. They trade like stocks, so you buy shares at a time and trade them whenever you want.

Bet on the Future

Commodities are different than stocks in several ways, one being the factors that cause price changes. There are different factors that cause commodities prices to move up or down, so don't use your stock investment know-how in this market. The commodities prices that you see increasing today may be the worst ones for you to buy, because they can crash tomorrow. Commodities prices are often cyclical, so the way to make money is to determine which commodities prices will rise tomorrow or next week.

Good News is Often Bad News

Good news in the industry often influences commodities prices negatively. This is counter-intuitive but important to keep in mind while trading. Don't take positive news stories as signals for a commodities price increase. For example, if a gold mining company finds a new mine with lots of potential, the company's share prices are likely to increase, but the price of gold is likely to decrease because of the laws of supply and demand -- too much supply pushes prices down