Many individual investors interested in learning how to trade futures are often unable to distinguish the difference between hedging and speculation in the commodities markets. In order for an aspiring trader to learn how to trade futures, they must first be able to distinguish the difference between the hedging and speculation styles of trading.

Commodities markets mainly are known for speculative traders. These traders have no intention of taking or making delivery of a futures contract they have traded. They are simply trying to predict the direction of the market in order to make a profit from price movement. In order to achieve this profit, they take on an equivalent amount of risk.

For example, a trader from the Midwest region of the United States learning how to trade futures may want to begin trading a familiar market, such as the corn market. If they suspect the price of corn is going to move up in the future, they could simply buy (go "Long") a futures contract. On the other hand, they could sell (go "Short") a futures contract if they predicted the price of corn to decrease in the future.

Every speculative trade has both a buyer and seller who take on risk in order to potentially profit from price movement. Neither the buyer nor the seller has an interest in taking or making delivery of the commodity at the futures expiration date.

People learning how to trade futures often overlook the other type of trader found in the commodity markets: the hedger. The hedging side of the commodity markets is made up of commercial producers and consumers looking to eliminate their risk from changing prices. Hedgers have the opposite trading strategy of speculators: they try to eliminate risk in order to lock in attractive prices for goods they produce or consume, whereas speculators take on risk in order to receive a potential profit.

Using the corn market for another example, a producer such, as a farmer, is often looking to hedge their crop. The farmer has a full crop growing on his farm that won't be ready to harvest for 3 months. Because the farmer is worried that the price of corn may drop, giving him less profit when it's time to sell his crop, he decides to hedge his crop my selling futures contracts. By selling futures contracts equivalent to his crop size, he essentially will lock in the current price for his crop. The farmer will fulfill the full obligation of the futures contract and make delivery of his crop.

Many aspiring traders who want to learn how to trade futures often cannot distinguish the difference between a speculator and a hedger. The difference between the two styles of trading is extremely important because they are exact opposite styles of trading.

THERE IS A SUBSTANTIAL RISK OF LOSS INVOLVED IN FUTURES TRADING AND IS NOT SUITABLE FOR ALL INVESTORS.