The commodity futures market is intense and volatile. It is an arena of great winners, as well as losers, calculated decisions and grave mistakes. Online commodity futures trading is not however, the place to try one's luck. For those with experience, financial resources, and commitment, looking up a good online commodity broker, opening an account, and diving into high-risk trading, may be worth a try.
What is Commodity Futures Trading?
Commodity futures trading involves the purchase and sale of futures contracts for different commodities — products in the agriculture, metals, and energy sectors. An investor can buy a coffee futures contract for 30,000 pounds of coffee, or a crude oil futures contract for 1000 barrels of oil. With futures trading, it is not actually the goods that are exchanged, in most cases. Rather, it is a contract made between the buyer and seller, through a commodity broker, where each side has agreed upon a price and a date in the future to make the financial exchange.
When investors trade commodities online, they simply open an account with an online commodity broker, deposit sufficient funds, and begin trading. Money is put down in the beginning, known as the initial margin. The margin is decided by the exchange clearing house. For example, the Chicago Mercantile Exchange, which oversees a number of different commodities, may set the initial margin rate for a lean hog contract at $1,418, and the maintenance rate at $1,050.
The margin acts as a measure of security for the clearing house, but it also forms leverage, the basis of the opportunity and risk for the commodity trader. When the value of the futures contract increases, money is added to the trader's account at the end of the day. On the other hand, if the value drops, money is taken out. When the amount in a commodity trading account dips below the maintenance margin, then the trader has to add funds to reach the initial margin again. It is important to keep in mind that the potential losses and gains are amplified through the use of margins and leverage. A commodity trader can lose or gain much more than they put down for the initial margin.
How to Trade Online
With electronic trading, investors can exchange commodity futures online. The internet puts instant access to information and trading opportunities at a new investor's fingertips. Through an online commodities brokerage, a trade can occur in moments, and with a relatively inexpensive commission.
To open an account, a new investor has to register with a firm and prove that they have the financial resources for commodities futures trading. Many brokerages, such as Lind Waldock, offer simulated trading. This is a useful tool to practice with at the beginning. With an activated, funded account, trading is as simple as pushing a button, and as difficult as navigating through the dangers of the commodities market.
Finding an Online Commodity Broker
Although having a personal online commodity broker may be a little more expensive than independent electronic trading, the guidance of an experienced professional may be invaluable. Some online brokerages have the option of trading independently at a low rate, and offer personal brokers as well. There are also listings for commodity brokers, such as CommodityBrokersOnline, or check local listings, and meet a potential broker in person. Decide what level of interaction is required to make online trading the best experience possible.
Commodity Trading Advice
Instead of diving headfirst into online futures trading, it is wise to follow basic commodity trading advice. First, research the markets. Know exactly what forces and influences are involved in each futures contract. Second, develop a strategy. Trading on impulse and intuition is a dangerous game in the commodities futures market. Make a plan and maintain the patience to follow it through. Third, keep in-depth records of financial data. Learn from early exchanges, from losses, and gains. Follow interesting prospects and track the numbers.
If online commodity futures trading is too overwhelming, don't do it. Consider entering into a futures mutual fund instead, allowing a professional fund manager to make the difficult decisions. Commodities is an excellent, dynamic market; but, it is not for everyone.
Sources:
Levinson, Marc. "The Economist: Guide to Financial Markets." Third Edition (Bloomberg Press, 2003).
"Learn About Futures Trading and Commodity Trading." (Clear Trade Commodities).
Brenna Coleman - Brenna is a freelance writer focusing on natural health and beauty. She has written hundreds of articles, helping readers find ways to ...
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