Page 89

sale of contracts. On the other hand if gold prices have increased, you are forced to buy the gold at a higher price than you received when you sold the contracts and make the delivery; clearly a loss.

You can see that when you enter a short position, you want the underlying commodity to drop in price in order to make a profit. But what about offsetting your contracts like we mentioned? In our example if gold futures prices have dropped, you can then offset your short position by buying (going long) gold futures contracts at a lower price and therefore realize a net gain in the end (original price-current price > 0) without having to make any delivery. Once again, very rarely do any contracts result in deliveries. They are almost always settled.

A natural question may now arise. Should I sell or should I buy contracts? Which strategy would give me the best gain? The truth is that it all depends on your personal taste, the direction you believe the underlying commodities are headed, and of course luck. If you believe that the price of a commodity is headed higher, you should enter a long position (buy the corresponding contracts). And if you believe that the underlying commodity is headed lower then you go short on the contracts (sell them).And as the underlying commodity begins to move (hopefully in a favorable direction) you can offset your contracts by entering an equal but opposite trade at the right time and realize a profit. Of course your speculation may end up wrong and you may find yourself in a loss situation. In that case you have to be prepared to cut your losses and settle your positions to prevent further erosion of your investment.When it comes to the world of trading one thing is certain: uncertainty. So you must be prepared to make quick decisions to lock in profits or stop losses. The good news is that there are ways to protect yourself to some degree such as trading options, discussed in the Options chapter. …