A Brief Guide to Commodities Trading

Commodities are the raw materials that we use for sustaining lives. Some of the examples are energy and fuel, agricultural products, and metals. Metals, agricultural products, and energy are three classes of market commodities. These are the essential pillars of the global economy.

Trading commodities

Criteria that commodities need to fulfill

Commodities need to fulfill these three criteria:

  • Tradability: Tradable commodities needs to have values that can be used as production materials of other goods or servicers.

  • Deliverability: Can you physically deliver the commodities to the buyers?

  • Liquidity: Commodities’ liquidity offers you an opportunity to get in and out of an investment easily.

You can access more info about the criteria here.

If you decide to invest through commodity companies, managed funds, or futures contract, it is important for you to research and gather all possible information, before you place the first trade.

Pro tip: The performance of the selected investment vehicle will depend on that commodity’s tangible supply and demand activities.

The questions to answer before you start trading commodities

Before entering into the commodity trading arena, ask yourself the following questions.

  • Which country holds largest commodity reserves?

  • Is that country stable or vulnerable to political chaos?

  • How much of that specific commodity is produced regularly?

  • Which countries or industries are the largest consumers of that specific commodity?

  • What are primary uses of target commodity?

  • Does the commodity have any alternatives? If so, will they cause a considerable risk to target commodity’s production value?

  • Are there seasonal factors, which can affect that commodity?

  • What are consumption cycles and historical production for the commodity?

Once you understand these basics, then you can prepare yourself to start trading.

What’s next?

To get started, here are your next steps:

1. Open a commodity brokerage account

Firstly, you will need to open an account with reputable and licensed commodity broker.

A commodity broker is technically termed as ‘Future Commission Merchant’. The FCM is certified to seek and implement commodity orders on behalf of consumers at the exchange, and accept fees for this service.

2. Do in-depth research and analysis on the broker

Do comprehensive research and thorough analysis on commodity brokers before choosing the right trading platforms that best serves your needs. Gather information about the brokerage firm’s history, clients, license, regulatory data, trading platform, and most importantly, the standard of customer service they provide.

3. Choose the right commodity platform

Choose a commodity platform that will serve you best in the long run. Majority of firms provide two kinds of account. Your selection must also depend on types of trading tools they provide. Also, it would make sense to choose the broker services that offer personalized help from their experts.

Two types of trading account

What type of account that you actually need to trade commodities?

1. Self-managed trading accounts

A confident trader, who has a good knowledge about market basics, and desires to directly control all the commodity trading activities can opt for self-managed accounts. Here you will be responsible for any consequences that come out of your decisions, be it winning or losing.

Pro Tip – Before opening self-managed account, understand all the features that are offered by the broker. Consider minimum capital requirements, reasonable account maintenance charges, and commission percentage.

2. Managed accounts

For an investor, who does not follow the trade market activities regularly, or if he/she is not well-versed in trading strategies, or does not have time to take care of the trading account, managed accounts will be ideal. The responsibility of making the decisions to buy and sell will be done by the professionals.

Pro Tip – Prior opening managed account, determine investment goals, risk tolerance, time horizon, and find CTA to manage your account. Also, check minimum capital needs, management charges, and commission you will need to incur.

With a trading account, you get linked with the commodity exchange market. You get access to main products of the exchange, like options on futures, future contracts, and other derived products.

Takeaway

It does not matter, if you are engaging in a trade or purchasing a forward contract, you will need to go through particular entry order procedures. However, when you place an order at commodities exchange, consider the following factors like action, quantity, time, commodity, price, type of order, open, or day order. Don’t forget to check the expiration dates of the commodities, because roll over might not be possible.

Do you have anything to add? If so, please leave your tips in the comment section.

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