Commodity Trading Considerations

Whatever you stake in Commodity Trading, producer, consumer, client – broker, the market has become quite confusing resulting in costly mistakes and susceptibility to rip offs. Add to this the occasional update on rules and regulations one has to keep up with due diligence is a constant requirement for both new entrants and existing experienced participants. Old rules and techniques cannot keep pace with the process changes due to sheer volume and faster trading brought on by the application of technology.  The up sides of this progress outweigh the down sides but if we can’t manage the latter we are destined for failure.

We have made it clear in previous articles of the basics you need to grasp and the knowledge you need to obtain and practice the closer you get to being a fully fledged broker. The deeper you go the more you need to know and the more at risk you are to both genuine losses as well as those you might suffer at the hands of less scrupulous ‘practitioners’.

So as well as studying and executing the ethical side of the business we deem it necessary that you keep yourself aware of the dark side of the street. Keep up to date through the web and use sites like www.bforex.com  for occasional articles on relevant topics.

Let’s look at the pros and cons.

Positive:

Leverage. You are operating on margin here so you are committing on a fraction the total value thus reducing the amount needed in your trading account.
Commission Costs. It costs less to trade (buy or sell) futures contract than to trade the full amount of the commodity.

Liquidity. Speculator involvement = futures contracts liquidity (relative to alternatives). Liquidity depends on the actual commodity (and contract type) being traded. Electronically traded contracts are the most liquid whereas the pit traded commodities (foodstuffs) are more expensive to trade. For our purposes the pit refers to the floor of the exchange.

Ability to go short is always an option as your Contacts are sold as easily as you bought them. Speculator will profit from both falling and rising markets.

Negative:

Leverage. This can be a minus too in that the lower the margin need the more chance of poor cash management which can lead to unnecessary risk taking

Speed of trading. Pit traded commodity transactions will tend to take longer due to the traditional process. This increases the risk of slippage. Online trading can reduce this but not all commodities can be removed fully from the pit to online trading

This is the last in our current series of article but please look out for more to follow.
Remember the articles should be read as a series to assist in a steady learning curve.
Go back over them regularly and seek to add to your knowledge and techniques by further reading.
We wish you success in Commodity trading be it up to broker level or just a client level operation.