Quite a murky subject to many people, even some bankers. Long, short, hedge, resistance, support, (these are just the basics) and other jargons that often characterize commodity and forex trading, make the highly rewarding activity unattractive to many. And it doesn’t have to be so. Don’t be left out of the fun and money, because of the jargons and myths.
- It’s Buying and Selling
Online forex and commodity futures trading, like many forms of trades you know, is based on the simple buy and sell concept. The trader usually believes that the commodity will move in a particular direction, and then buys or sells based on what he believes. You make money when you buy at a price and sell it back at a higher price (not true for some currency pairs though).
- You Can Sell What You Don’t Have
Probably, this is where the myth lies for many who have never traded before and are very new to the subject. Unlike physical trading where mostly, you can only sell what you have or what you have already bought in the past, forex and commodity trading is even better – it works both ways. You can sell what you don’t have. For instance, if you believe that the price of gold is going to fall from say $1,320, all you have to do is to sell gold at the current price of $1,320 and buy it back when the price falls to a level where you’re okay to take your profit. Let’s say the price falls to $1,270, then you make a profit of $50 per unit sold. Effectively, you have bought at $1,270 and sold at $1,320. You can sell what you don’t have, and buy same amount back when the price falls, to close your position and take your profit. It’s called short trading, or shorting.
- Profits Can Be Enlarged
Most online brokers offer you an opportunity to trade on margin. What this simply means is that you can trade bigger volumes or amounts than the money you credited your account with. For instance, in a 50:1 leverage, and if you deposit $1000 into your account, you have up to $50,000 to trade with. To enter a trade of $10,000 you’ll need only $200 if your account leverage is set to 50 to 1. To trade on margin, you’ll need a margin account. This is different from the usual cash account you know of. Basically, you can think of it as your broker lending you money to trade with. Margin account is often part of the standard account opening process, but in some cases, separate. While leverage allows you to control a large amount of capital with a small cash deposit and make your profits bigger, similarly, it also exposes you to significant losses. Your profits are enlarged equally as your losses.
- You’re in control
Once you take a position (make a trade), you would be in profit or loss when the price moves away from the price you entered into the trade. Apart from being closed out by your broker when your losses exceed or equal your cash deposit (plus or minus profit/loss to date), you’re usually in charge as to when you want to realize your gains or cut your losses.
These characteristics about online forex and commodity trading make them seemingly different from regular physical or online trades, but in reality they’re not so different after all. Understanding first, before trading is very important.
Online commodity and forex trading by individuals is not as popular in many parts of Africa as it is in Europe, America and Asia. However, in Kenya, Nigeria and Ghana, interest is growing among individuals and you also want to jump on this trillion dollar train and make some money, albeit carefully.