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Futures contracts on commodities are investment vehicles that invest in bulk goods, such as grain, oats, corn, beef, pork bellies, coffee, gold, silver, oil and natural gas. Commodities are traded on an exchange or in the cash market depending on the commodity type.

Investors, who do not trust stock performance, particularly in periods that economies experience contractions, are more likely to invest in commodities in order to achieve effective diversification of their portfolio. Investment managers assess that a diversified portfolio should have an allocation of at least 5% to gold and other commodities. Although exchange-traded funds (ETFs) are considered to offer such an exposure, still trading commodities seems to be a better solution.

On the other hand, commodities are considered a risky investment. In fact, when an investor buys commodities, he buys futures contracts, which expire on maturity date. This means that when the contract expires, the investor either gains the difference or he gets the commodity. However, when investors buy commodities they do not intend to use the commodity. So, in effect, if their position is not closed, investors do not gain any added value for commodity trading. This is why commodities are considered too risky for what they are worth.

Investors that invest in commodities are usually advised by their traders not to risk too much of their account value on a single trade. Instead, trade must be made in stages, particularly if the market remains relatively stable. The reason is that, when the market is highly volatile trades are made at a quick pace. However, commodities should not be followed on a daily or an intra-day basis because their nature requires to be forgotten after initial positioning and until maturity.

Instead, when the market records an upward trend, investors should take advantage and gradually sell at least 25% of their portfolio holdings in commodities to lock in profits. Moreover, they should have always set clear entry and exit points so that they avoid lowering their trading stops expecting that a losing position will recover.

Trading in commodities futures requires keeping track of the fundamental reports that affect the market. Investors should be continually informed about news coming out in order to adjust their portfolio accordingly. The aim is to maximize profits and minimize losses. while adhering to the original investment strategy.

Learn more about this author, Christina Pomoni.
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