How did all this get started? 
        Futures contracts were originally used by farmers and buyers of farm products to even out the big price swings in the underlying commodity. Futures contracts satisfied both sides. Companies needed to lock in the price for the corn they used to make corn flakes. At the same time, the farmer slept better knowing what he’d get for his corn before it even sprouted. 
        Over time, investors developed hundreds of complex trading strategies that have nothing to do with farming or food. There are now contracts for more than 400 different products or financial instruments trading on some 60 exchanges around the world. Everything — from the price of Japanese yen to the interest rate on a 30-year Treasury bond to the S&P 500 stock index — is traded. If it goes up and down in price, you can probably find someone who can trade it. 
  
        Can I afford this? 
        Good question: Commodities trading is not where you want to put the rent money or your kid’s college savings. Due the relatively low initial capital requirement, it can make or break you in a relatively shorter time than other place such as the New York Stock Exchange. Unless you can afford to lose it all, stay away from futures. And even if you’re wealthy, most financial advisers suggest limiting Commodity Futures market investment to 10 percent of your net worth. 
        Once you’ve decided how much you can wager, you need to look at the margin requirement, which is the amount of cash you actually have to come up with for a given investment. Part of what makes this such a high-performance investment is “leverage” — with a small bet, you control a lot of an investment, but you still have to keep a minimum balance to stay in the game. If your investments go down, you may have to put up more money to stay in the game. Or be forced to sell off everything at a loss. 
  
        One more time: leverage 
        Leverage is what happens when one side of the seesaw is longer than the other: A small move on one side makes a big move on the other. In futures trading, the lever is the small amount of money you need to control big price moves of the underlaying makrets you’re investing in. 
        Example: As a stock investor, you can buy $10,000 worth of stock with only $5,000 in cash, and the rest on margin, in the form of a loan from your broker. If your stock doubles in value to $20,000, you make four times your $5,000 investment (minus any amounts you owe your broker). 
        Leverage in the futures market is even bigger. Say you bought $10,000 worth of gold futures for, say, $500. If the value of that gold doubles to $20,000, now you’ve made 40 times your $500 investment (minus any money you owe your broker). 
        That’s why commodities traders can lose so many times and still keep coming back for more. Even if you bet right only 30 percent of the time, as long as those bets are big enough, you’ll make back your money and then some. 
        But that leverage comes with a price. With stocks, the worst you can lose is your initial investment. But if you buy a futures contract, you’re agreeing to buy a certain amount of the underlying commodity or financial instrument at a fixed price, no matter what. If you buy a contract to purchase $10,000 worth of gold and gold prices drop in half, you’ve got to come up with the difference (that’s called “marking to market”). So you will have lost 10 times your initial $500 investment. 
  
        Why consider such risky things? 
        One reason is the old saw about not keeping all your eggs in one basket. Stocks and commodities usually march to different drummers, so many investors use them as a hedge. In 1987, for example, when the stock market struggled to stay in positive territory, managed futures accounts rose 57 percent. 
        Second, some investors like the relative simplicity of the factors that affect futures prices. Commodities tend to move on big market forces, like weather, inflation or political upheaval. While unpredictable, these trends are sometimes easier to spot than trouble in a corporate balance sheet or troubling legalese in a bond covenant. And, unlike stocks, where everyone loses, there’s always a winner in futures contracts. 
  
        Just you and a quote machine? 
        You don’t have to be attached by the hip to a quote machine, because not all commodities have the same volatility. Unless you are a day trader, moving in and out of contracts in a matter of hours, you’ll want to look for commodities where prices tend to swing over time. Bond futures, for example, have plenty of short-term ups and downs, but over the longer term, they track trends in interest rates. Look at recent trading patterns of various commodities before you invest. The contracts with smaller price swings may have a lower payoff, but they are easier to keep an eye on outside the trading pits. 
        For starters, stick to one or two contracts. It’s hard to keep up with more than one commodity at a time. And if you want to test the waters, try “paper trading” a few contracts and see how you do. 
  
        If you are not a guy to shot from the hip... 
        If you prefer to invest in something you can research, there’s plenty of opportunity to study commodities investments, even if many of the forces that move prices are unpredictable. There are two basic methods for deciding when to buy and sell — technical and fundamental. 
        Technical analysis of the market is based on trading patterns over time that seem to repeat themselves. So technical analysts spend a great deal of time analyzing charts, looking for patterns that may indicate which way the market is headed. 
        Fundamental analysis deals with news events or forces that affect supply and demand, like weather, inflation, political turmoil, etc. Prices also tend to trade in ranges — sometimes as a result of seasonal factors. 
        One key piece of fundamental data: government reports. The USDA, for example, puts out volumes of data on the size of the nation’s cattle herds or how many hogs are headed to market in a given week. All of this ultimately affects how much ground round will cost at the supermarket and how much your beef is worth. 
  
        Time to unload 
        OK, so you get your hands on the Hogs and Pigs Report and you’ve been “paper trading” like I suggested. You just made $40,000 in 23 minutes. Where do you unload all these pork bellies? 
        Good question. It’s one you’ll care a lot more about when you start using real money. First, you want to sell your contract before it expires. 
        To be sure you can get out, you want to be in a market with plenty of “liquidity” — plenty of active buyers and sellers. Because even if you have a winning hand on paper, if you can’t find a buyer — before the market moves against you — you’ll have only bragging rights and no profits. To find a liquid market, look in the paper at the number of contracts outstanding for a particular contract. Usually, the more volume in a given contract, the greater the liquidity. 
  
        Quick! My broker’s on the phone 
        Now what do you do? Take a deep breath. Decide which commodity you want to trade; whether you want to buy or sell (do you think the price is going up or down?); how many contracts you want; at what price you want to trade; and how long you want to give your broker to fill the order. Some common types of orders are: 
  Market order: (or “at the market”) means you’ll buy or sell at the current price. It’s a good way to make a quick trade, but it may not be the most reliable — especially in a fast-moving market. 
  Limit order: means you’ll buy or sell only at a specific price. While you have a better idea what you’re getting into, the trade won’t go through if the market never reaches the price you specify. 
  Stop limit order: This allows you to specify a range of prices that you’d like to execute for a trade. If the trade doesn’t go through at the specified stop price, your broker will keep trying as long as the market stays within the specified range. 
  Spread order: This is a popular hedging strategy that involves simultaneously buying one contract and selling another, with a given range of prices between them. Here you care only whether the spread widens or narrows the way you want, regardless of the underlying prices. 
        For example, you might buy a November wheat contract and sell a July wheat contract, hoping that the spread narrows over time. As long as you gain more on one transaction than you lose on the other, you’re ahead of the game. Traders look for all kinds of spreads “ between contract dates, between one market and another, between a currency and interest rates, etc. 
  Fill or kill: Just like it sounds: Fill it right away or not at all. In a fast-moving market, this limits the risk that the trade will go through at a vastly different price than you wanted. 
  
        Can I trust the pit? 
        You’re wondering about all that shouting and arm-waving in the trading pits, and the possibility that someone will make a mistake, causing your order to go awry. Don’t worry too much. Orders over the phone are almost always tape recorded, so later if there’s a dispute, there’s a record. If the trade isn’t what you asked for, you can dispute it. The exact procedure is spelled out in the agreement you sign when you open an account. 
  
        Pros and cons of commodity funds and pools. 
        You may want to look into a commodity fund, a kind of mutual fund for commodities investors. As in mutual funds, you’re buying the expertise of the manager or managers who are making specific buy and sell decisions. And, from most of the larger brokerage houses, you’ll get a monthly statement showing where your money is going. But there are important differences: One is that the fees for commodity funds are typically higher than for mutual funds. 
        One big benefit is that only the money you’ve invested is at risk. Even if your fund is completely wiped out, you won’t hear from a broker looking for you to put up more money. 
        Commodity pools are similar to funds, but there are key differences. One is the price of entry: Usually you need a minimum of $10,000 or $25,000 to get into a pool. Another is fees: On a percentage basis, fees tend to be lower for commodity funds than pools. 
  
        Let the broker do the work 
        Can’t I just find a broker and let her trade for me? Sure, but you’ll probably have to play with the high rollers. 
        Most advisers are looking for accounts of $100,000 or more. You’ll pay a fee for each trade, much like a commission on stock transactions, and an advisory fee based on how well your account performs. And unlike with a fund, you’re at risk for more than just your investment: If the market turns against you, you have to come up with more than you originally put up. (Obviously, that’s not what your adviser has in mind, so many accounts stay less than fully invested to provide a cash cushion for market downturns.) You’ll also want to make sure the adviser is registered with the Commodities Futures Trading Commission, the federal agency that regulates the commodities markets.