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Online Commodity Trading: What You Need to Know

Online commodity trading is rather a simple process, but it is a method that requires a thorough research.

For a trader, knowing how to trade commodities is important. Huge profits can be achieved, if a trader really understands what is affecting commodity prices and the system of how to trade on it.   

The introduction of online commodity trading in global markets means that commodity markets are now accessible to millions of people around the globe. Today, several countries run commodity futures exchanges. 

If you are considering of trading commodities online, there are important factors to remember.

online commodity trading infographic

Choosing a Broker

Nearly all commodity brokers offer online trading, but there are some who mainly focus in online trading.

A number of firms offer the best online trading platforms for charts, quotes, plan assessment, and order entry. Many online brokers also provide great products, excellent service, and low commission fees.

Moreover, having an experienced broker is likely to keep the person from committing risky actions. Therefore, asking advice of broker is important to develop an individual’s trading abilities.

Account Requirements

Every individual needs to provide the information necessary to open a commodity account. The forms will involve disclosure of financial data and determining potential risks in trading commodities.

Monetary details, such as income, net worth, and credit value is important, as commodities are extremely leveraged assets. There is always a possibility that a person can lose money bigger than what he originally invested.

However, not everyone who accomplishes the forms is fitted to have an account. Brokers might mull over whether a client is a good enough risk and is right for commodities trading. Adequate income, trading skills, and credit are vital factors of suitability.

Funding the Account

Once an online broker has been chosen, and you got a green light for trading, the next thing you will have to do is fund the account.

How big the size of the account will be is entirely up to you, as you will need to consider your comfort level and risk tolerance when funding the account.                   

Train First

Several brokers offer demo accounts that can be used before actually starting to trade with real cash. Practicing will help beginner traders get acquainted with placing orders and could save them from making serious order entry mistakes.   

Choose Wisely and Avoid Overtrading

Not being selective and making excessive trades are some of the greatest downfalls of many commodity traders. That is why it is important to choose your trades wisely and avoid overtrading. If you set several trades, but received no profit, then you are likely overtrading. 

Learn the Basics of Supply and Demand

Keep in mind that futures and options markets are derivatives of the real market for delivering the commodity being considered.

For that reason, it is crucial to know the basics of supply and demand for that asset.  There is lots of information presented for free from commodity exchanges, trade organizations, as well as government agencies that provide free commodity data.  

In the energy sector, the American Petroleum Institute (API) and the Energy Information Administration (EIA) are the standard sources for information.

Advantages and Disadvantages

Trading commodities online has risen to popularity in recent years. Not only are trades done faster, but commissions are lower as well. While there are a lot of benefits to trading commodities online; investors must also know the risks with using this method. 

commodities

Online commodity trading also have its disadvantages that traders should be aware. There are some hazards that beginner investors might miss before they open an account.

Here are the advantages and disadvantages of online futures trading.

Advantages

Simple and Convenient Trading Experience 

Online commodities trading offer simple and convenient trading experience to investors. They provide excellent integrated trading platforms for fast, efficient, and reliable execution of trades.

Traders nearly have all they need, when they access their account. A number of resources, such as live quotes, charts, futures news, analysis, and even online supports are made available to them.

For beginner traders, they will be able to use the research and trading services that are needed to help them perform their trades.

Flexibility

Flexibility basically means investors have the freedom of observing the market and making quick trades, if they deemed it necessary. Online trading is virtually instant, offering the independence to trade at one’s convenience, anywhere and anytime.

Lower Commissions

Besides faster execution of trades, trading commodities online have lower commissions as well. Buying and / or selling futures contract are cheaper than buying and / or selling the underlying instrument.

Liquidity

Another major advantage of online commodity trading is liquidity. Liquidity is illustrated by a high volume of activity in a market. Assets that can be bought or sold with no trouble are considered liquid assets. The participation of investors also indicates that futures contracts are fairly liquid.

High Leverage 

Leverage is the use of borrowed capital or margin to boost the potential return of an investment.

With online commodity trading, traders only have to pay a small portion of the overall value of a position to get full benefit and higher profits. Margins in this market are also lower than equity futures and options.

Diversification

Commodity prices are sensitive to supply-demand factors, weather conditions, geopolitical tensions, and natural disaster.  Nonetheless, they have long experienced low or negative relationships with the returns of other major asset classes, which may be used to diversify an investment portfolio.

Commodities respond differently from stocks and bonds in various economic and geopolitical situations. Therefore, improving risk-adjusted returns and easing volatility of a portfolio.

Disadvantages

High Leverage  

High leverage also includes high risk to the account. It acts as a double edged sword, where a low margin can cause poor money management.

Commodity futures operate on margin. This means that taking a position only a fraction of the overall value has to be offered in cash in an account.

Over Trading

Online commodity trading may get risky, if investors are careless and have no discipline. Traders might have the habit to stray from their original trading method and change to day trading, after they grew tired of holding a market position for a significant period of time.

Investors having this type of behavior may lose a huge amount of their money in online commodity trading. While those who are well disciplined and have a firm trading strategy, trading commodities through an online broker is the best way for them.

Lack of Professional Opinion

Investors trading on their own also mean that they will have to solely rely on their own decisions, of which they are more prone to commit mistakes. No one is also going to advise them to exit the position either to close for profits, or to cut loss.

Having a professional broker can offer a trader reassurance, since the job of the broker is to analyze all parts of the market, as well as on-going research and information that may affect the market. Brokers can also help lessen or remove emotional trading.

Order Types

Small details at times make the huge difference in performance. Knowing order types and how to appropriately place each of them is important to be successful trader.

Here are the most frequently used order types.

Limit Order

It is an order that executes the trade at a specific price or better. Buying a contract can only be done at the limit price or lower, while selling a contract can only be executed at a limit price or higher.

Given that a limit order is not a market order, there is a possibility that it would not be carried out, if the price set by the investor cannot be met during the time in which the order was open. Investors could also cap the time an order can be outstanding before it gets canceled.  

Market Order 

This is the most common order, since it the most convenient and the simplest of the order types.

It is an order, which should be executed immediately at the prevailing or the best available price on, or after placing such order. If there is no market at a certain point of time, it takes the last traded price and stays in the system.

Market orders are the default options and could be executed, since they do not have limits on the price or time frame in which the order can be performed.     

Day Order 

Day order indicates how long the order is in the market before it is canceled. 

This type of order is available for execution on the day the order was placed. All day orders will automatically expire at the end of the day during which such orders were submitted.

Read also about Day Trading Strategies and Tips to know how this single-day trading method works. 

Stop-loss Order 

Stop-loss order is placed only when the market price of the particular commodity meets a threshold price. It is used as a tool to help reduce the investor’s loss on a position in a security.

Stop-loss order can also protect not only a long position, but a short position as well, in case the security gets purchased if it trades higher than the specified price.

Conclusion

Online commodity trading has bolstered the pace and success rate of execution. Whether you should consider trading commodities online greatly rests on your skills and the support of the broker.

While wealth can be acquired from commodity trading, chances for losses are just as high. Therefore, it is important to exercise caution, be precise, and keep trading to a minimum, as errors could come at a great price.

HQBroker is here to give you a daily news roundup about the forex, commodities, technologies, automobiles, and economies. You can open an account now and make yourself updated with essential news in the market. Share your thoughts and experiences with us by commenting your HQBroker reviews.

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