A hedger buys or sells a futures contract in order to reduce the risk of loss through price variation. A short hedger sells a futures contract to protect the possible decline in the actual commodity owned by him. A long hedger purchases a futures contract to protect the possible advance in the value of an actual commodity needed to be purchased in the future. As a speculator we don’t need to be concerned with what a hedger does. A futures speculator is like a speculator in any other asset. He seeks to profit from price changes. The speculator is an important factor in the volume of future trading today. He, in effect, voluntarily assumes the risk, which the hedger tries to avoid, with the expectations of making a profit. He is somewhat of an insurance underwriter. The largest number of traders on any commodity exchange is the speculator. In order for the hedger to participate, he must have continuous trading interests and activity in the market. This trading activity stems from the role of the speculator, because he involves himself in the buying or selling of futures contracts with the idea of making a profit on the advance or decline of prices. The speculator tries to forecast prices in advance of delivery and is willing to buy or sell on this basis. A speculator involves himself in an inescapable risk. Speculators, or traders, assume the price risk that hedgers attempt to lay off in the markets. In other words, hedgers often depend on speculators to take the other side of their trades adding depth and liquidity to the markets. Many people are attracted to futures market speculation after hearing stories about the amount of wealth that can be made trading futures. While there are success stories, the number of big-time traders is not unlike the number of superstars in professional sports. Many people strive for the top, but few ever reach it. At the same time, many people have achieved a more modest level of success in futures trading. The keys to their success are often hard work, a disciplined approach, and a dedication to master their trade. If you intend to follow this path, this method can help you get started. Now, can you be a speculator? Before considering entering into the futures market as a speculator, there are several facts that you should understand about the market, and also about yourself. In order to enter into the futures market, you must understand that you are dealing with a margin account. Margins are as low as 5 to 10% of the total value of the futures contract, so you are obtaining a greater leverage on your capital. Fluctuations in prices are rapid, volatile, and wide. It is possible to make a very large profit in a short period of time, but it’s also possible to take a substantial loss. In fact, surveys taken by the different exchanges have shown that 80% of the individuals speculating in commodity markets have lost money. This does not mean that some of their trades were not profitable, but after a period of time with a given sum of money they ended up being a loser. This has been a wellestablished fact for some time now. The 80% lost by the public, funnels into the pockets of the 20% who are able to profit at trading. Study, learn a system, or method, use discipline, and be one of the 20% who trade successfully. Now taking you as an individual, let us see whether you have the characteristics to become a commodity trader. Number one, and most importantly, is that you do not take money that you have set aside for your future or money you need daily to support your family or yourself. Number two, and almost equally as important, is that you must be willing to assume losses and be willing to assume these losses with such a temperament that it is not going to affect your everyday life. Money used in the futures market should be money that has been set aside for strictly risk purposes and if this money is not risk capital, then your methods of trading could be seriously affected, because you cannot afford to be a loser. If, for any reason, you are uneasy with a position that you are holding, it’s better to liquidate it now. If, prior to the time of buying or selling a contract, you are not sure that this is the right step to take, do not take it. To protect yourself against this hazard you should pre-decide on every trade exactly now much you intend to lose. If you are in a winning position, be conservative as to how you add additional contracts or pyramid your position. If you think this is the perfect trade then buy the extra contracts now. Don’t build an upside down pyramid. If you take the time to paper trade and learn this simple method you can be one of the few who succeed. It’s your money; if you give it to a broker, kiss it goodbye. Most of the losers have never traded their own account or knew any thing about technical analysis, let alone what a futures contract really is. Study the charts; learn how to measure the risk and the reward; use the discipline to take small losses. There is a saying that you let your profits ride, but liquidate your losses fast. If at this point you feel that you are ready, both financially and mentally, to trade commodities, the next step is to begin the actual mechanics of trading a futures contract.
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