Wednesday, October 3, 2007

Commodities Trading - Basic Risk Management - Hedging

If you're a commodities trader or are looking to become one, you know that two elements motivate you: speculation and hedging. Although speculation and hedging are not mutually exclusive and you can do both at the same time, speculation is primarily profit oriented. Hedging is more about protecting your profits or minimizing a potential loss and is therefore a defensive strategy.

When you hedge, you essentially recognize a hard fact; that is, traders cannot predict prices correctly all of the time. If you want to be on the right side of the trade, you need to not just to predict what direction prices are going to go in, but you also need good timing.

Although it's important to guess correctly whether prices are going to move up or down, you also have to know when you should get in and when you should get out. You can improve your odds of doing so with some simple hedging strategies.

To begin with, let's talk about a few elementary concepts. Hedging is effective, in part, because prices for commodities in the cash -- i.e., spot -- markets tend to move together, whether up or down.

In a "spot" or cash market, physical commodities are bought and sold. This differs from the futures market, where contracts are traded for future delivery of the particular commodity.

Even so, spot prices don't move exactly together. The difference between the spot price and the current contract price is called the "basis." The basis equals the cash price minus the futures price.

When they hedge, investors have two basic alternatives, either going short or going long. However, these two strategies are not used only to the exclusion of each other. They can be used together in a mixture, tailored to an investor's needs. If you "go long," that means you're buying in order to sell later at a higher price. If you "go short," that means that you're going to sell before you buy, and expect that the particular commodity will have a future price decline.

In regard to going short, it might confuse you to think that you're actually going to sell something you haven't bought first and therefore don't own. However, when you go short, you borrow the commodity or contract from the broker, sell it, and then buy the equivalent later to "balance the books."

When you go long, you hedge based upon a weakening basis as the cash price falls in relation to the public futures contract. Going short gives you the advantage when the basis is increasing; that is, when the cash price rises relative to the futures contract price. It should be noted that a basis can rise or fall in opposition to price levels. What matters is the difference between the two.

To clarify, let's look at the following:

Let's say a heating oil seller wants to hedge 50% of the anticipated April production of three million gallons. The seller goes short by selling the April heating oil futures contracts at $1.98 per gallon on March 1. By the end of March, cash and futures prices both have fallen. This means that on April 1, when the seller delivers heating oil to the local terminal, the price has fallen to $1.85 per gallon. The seller then simultaneously hedges by purchasing April ethanol futures at $1.90 per gallon.

Because the standard heating oil contract covers 42,000 gallons, the speculator has to purchase 35.71 contracts at this scenario. However, partial contracts aren't traded. The following figures are approximate, to make demonstrating this scenario easier:

Date Spot Market Futures Market Basis

Mar 1, $1.88 per gal.Sell in April at $1.98 per gal.-$0.10

Apr 1, $1.85 per gal.Buy in April at $1.90 per gal.-$0.05

The hedge result is as follows:

The gain on the futures trades is $.08 per gallon, with the sell in April at $1.98 per gallon, and the buy in April at $1.90 per gallon. $1.90 minus $1.98 equals $.08 per gallon.

The net sales price is $1.93 per gallon, or $1.85 plus $.08.

This results in 50% being hedged at $1.93 per gallon, with an April income of $2,895,000, or $1.93 per gallon times 1.5 million gallons. The remaining 50% is unhedged, at $1.85 per gallon; April income is $2,775,000, or $1.85 per gallon times 1.5 million gallons.

The average April sales price is $1.89 per gallon, for an April income of $5,670,000.

Without hedging, what would have been with the result? The seller would have received $5,550,000, or $1.85 per gallon times three million gallons. By hedging between the spot and futures markets, there was a net increase in April heating oil income of $120,000. Therefore, hedging cannot only help to protect traders from losses, but it can also increase profits.

Visit - Commodities, Stocks, Forex to find books, tips and advice about online commodity trading. Besides a large selection of free educational articles you can also find powerful books about online trading in general.

Other Resources: - Commodity Trading Links

Forex Trading And Home Business

Forex, ie foreign exchange market has become very popular due to its immense size, liquidity, currencies moving in strong trends plus, an easy online access, relatively low starting capital and a big leverage.

All this is very attractive to many sorts of investors, speculators and also amateur people, especially online success chasers who imagine easy and fast profits. BUT it has its pitfalls and the Internet hype sellers and scammers make the situation even more dangerous.

Forex has enormous profit potential but since there is a substantial leverage involved working both ways, the same is the loss potential - the higher the profits, the higher the risk involved. And that is exactly the core of success in forex which is hidden from people seeking fast online profits.

People lacking basic character streaks like discipline, risk evaluation ability, experience and even basic information and training fall prey to false promises and start trading their last money on forex expecting quick riches.

It is necessary to be aware of the fact that trading currencies is not easy. If it was, no one would lose money and everyone would already be a millionaire. Many traders with years of experience still incur periodic losses. Everyone interested in trading forex must realize that trading takes time to master and there are absolutely no shortcuts to this process.

Yes, of course, it is possible to make it a long-term, profitable and sustainable source of high income and even a proper home business BUT the following are the basic rules for success in forex trading:

1. Discipline: it seems easy but the lack of discipline is the profit killer no 1. It is important to set your own rules and goals and stick to them. Do not panic if not everything goes the way you imagine and strictly keep the rules. One of the basic situations is losses: If you know you can lose only $1000, the discipline will help you stop trading if it happens, and not borrow and go on and on... Also, it is the discipline which helps you avoid magic profit calculations.

2. Responsible risk-taking and risk-evaluation ability: forex trading is an investment method not a casino. It is not possible to invest properly if you are not able to take up a calculated risk, if you are not able to calculate an acceptable risk, and if you are not able to even recognize a risk. The good news is that you can develop this ability.

3. Spare money: never trade your last money, always invest either profit or a reasonable amount of money you can lose. Always behave responsibly and never borrow money to trade.

4. Thorough education and training, incl practical training: it is imperative that before you start trading live, you get proper education and training, that you acquire working knowledge and develop your own working system on which you can build your investment strategies, routines and practice.

5. Never trade in a live-or-die situation or under any stress: many gurus say that you can make instant riches from forex investing your last money. It is one of the biggest lies I ever heard. Unless you feel absolutely comfortable, knowing what you are doing and why, enjoying the trading, you cannot trade successfully. Any stressed, unbalanced or anxious mind and brain is not able to evaluate situations correctly, react competently, and it is a paved road to failure and losses.

6. Always do your homework: another hype you can hear around says that everyone can trade just following someone else's advice and instructions. I can tell you only one word as an answer: rubbish. You must realize that you must be able to evaluate every situation, every trend, every forecast, create all the analysis, follow necessary trends, incl, of course, hearing specialized analysts BUT the decision and the money is yours only, so the responsibility is yours. The better your homework, the higher and more reliable your profits.

7. Learn from your mistakes and remain flexible: you must know that you will make mistakes, you will even lose in some trades but you must be a great trader and you must know it. When you make a mistake you must analyze the situation, find out why it happened and see to it that you will not repeat the same mistake in the future. You must not despair and fall into depression. You must stay positive and simply do better next time.

Plus a little closing note to only make you aware of these important topics which, however, exceed the scope of this basic informational article:

- yet another risk is here: it is vital to choose the right market-maker, big enough to allow you to make full use of currency moves. I stress a market-maker and not a broker,

and also,

- avoid managed accounts.

In case you are interested in mastering forex trading and start with the above points seriously, you are on the right way to trading success.

Irena Whitfield is the webmistress of - Internet Business Consultant you need to make your online home business a real success. Without any hype, she will help you to get where you want to get. Get her new ebook Package 'Your Success Master Keys' , containing: 'Success Tips And Tricks' , '7 Stars of Online Success' and 'The Success Seeds: the Entrepreneurial Bible', and make your business profitable this year!

A Few Tips On Buying Underfloor Heating On the Net

As one of the fastest growing sectors of the building trade electric underfloor heating is becoming more and more popular, but with that comes more and more companies to choose from, most of these being online companies.

If youre like me thinking how do i sort out the good from the bad? How do i know if Im buying from a company that will deliver once I have handed over my card details? & that can stand buy me if i have a problem? The answer is simple really if you follow some of the pointers bellow:

First thing to do is check that the company address is displayed somewhere on the site, usually on the contact us page, if you cant find it what are you going to do if you need to contact them? Check they have a "proper" land line telephone number you can phone, and they are not just "hiding" behind a "080" number as many companies do.

Check to see if the company is a member of any online trading scheme, like the ISIS Internet Shopping Is Safe scheme this ensures that online traders follow strict guidelines that protects you the customer should something go wrong and its a point of contact for you to use if you do have a problem.

Look out for things like ISO9001:2000 registered company, if you see this and its genuine then you know for certain that that company has a set quality management system in place.

When your selecting your underfloor heating products and your thinking "wow this is too good to be true" then it probably is, the company may be selling the goods so cheap because they dont know what there doing, it may be a secondary income for them they may not be bothered about selling something to make 20, but they certainly arent going to be about to help you out when you need them and more than likely will just pass you on to the manufacture.

Another thing to remember when the goods are so cheap is: were do the goods come from? Are they cheap because the quality is cheap? What happens if i have a problem?

The morel of the story is in todays world you usually get what you pay for and when it comes to underfloor heating its just not worth scrimping and trying to save 30 at the end of the day, for most consumers its a little touch of luxury and normally its a one off expense that needs to last as long as the floor, so those companies who charge that little bit extra have the staff, insurance and resources to stand by you at anytime in the future, plus they have a reputation to uphold. All of the above should help to give you a more pleasant experience of buying electric underfloor heating on the net.

There are a few really good companies out there as well as not so good companies just be aware.

Underfloor heating is one of the most efficient forms of domestic and commercial heating today. Most underfloor heating systems are aimed at the DIY market but if you dont fancy doing it your self then why not contact us for a free no obligation quotation.