How to Make Consistent Profits Trading Futures

You can use a commodity’s unique attributes to develop a consistently profitable trading plan.

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Trading commodities can be a profitable alternative to stock and bond investing. When you trade commodity futures, you’re buying and selling the actual physical good. Corn, gold, crude oil and live cattle are traded on futures exchanges using standardized contracts. One contract controls a significant amount of the commodity. For example, one unleaded gasoline contract controls 42,000 gallons. When unleaded gas sells a $3 a gallon, the contract is worth $126,000. Commodity investors use different strategies to consistently profit from their futures trading.

Trading Crop Cycles

You can profit with agricultural futures by using crop planting and harvesting cycles to develop and time your trades. Corn, wheat, soybeans and oranges are some major crops US farmers grow annually. The United States Department of Agriculture releases crop reports throughout the year. One particularly important report is the USDA’s Prospective Planting report. The report details which type of crop and the number of acres a farmer intends to plant. By using USDA report information, you can formulate a trade based on the seasonality of different crops.

Calendar Spread Trading

Calendar spread trading takes advantage of the differences between commodity futures contract prices. Calendar spreads, also known as intra-commodity spreads, are widely used to trade agricultural commodity futures. Since most futures contracts increase with time, calendar spreads usually buy the earlier contract and sell the later contract. For example, you buy the May corn contract and sell the December corn contract. You profit as the spread between the two contracts widens. Should the spread narrow, you can close out the two contracts to preserve a profit or contain a loss.

Intermarket Spread Trading

With intermarket spread trading, you trade two different commodity futures contracts that expire in the same month. The spread is designed to consistently profit from either side of the trade. For example, you believe the price of gold will fall and silver prices will rise. You sell the February gold contract and buy the February silver contract. You profit when one contract price increases enough to offset the loss from the other. If gold prices fall, that profit is greater than the silver contract loss. If silver prices rise, that profit is greater than the gold contract loss.

Inter-exchange Spread Trading

Inter-exchange spread trading involves profiting from the price variations between different exchanges. Commodities such as wheat, crude oil and gold are traded on multiple exchanges. A trader can profit by taking advantage of the different prices each exchange has for the same commodity. For example, wheat is simultaneously traded on the Chicago Board of Trade (CBOT) and the Kansas City Board of Trade (KCBOT). You could buy the July CBOT wheat contract and simultaneously sell the July KCBOT wheat contract. You profit as the spread between the two contracts widens.