Thousands of years before the modern stock market existed, ancient civilizations would trade clay tokens in exchange for commodities like goats and pigs.
Today, the basic idea behind commodity trading remains the same: commodity trading, in simplest terms, is the buying and selling of basic goods and raw materials — such as precious metals, energy sources, livestock and meat, and agricultural products. In the modern commodities market, a common way to trade commodities is through the use of futures contracts, or contracted agreements to purchase or sell a commodity at a set price on a future date.
Among the most compelling reasons to start trading commodities are to diversify your portfolio and hedge risk during especially volatile or bearish stock markets. As a newcomer to the game, you will be in the best position to succeed in commodities trading when armed with the right resources. We connected with Geoffrey Hammond, a commodity trading expert, who outlined the top five resources for the beginner commodity trader below.
The phone numbers of your order desk and margin clerk. It’s a simple, but crucial tip: Keep the phone numbers of your order desk and margin clerks close at hand in order to be able to reach them quickly over the phone. Due to the volatile nature of fast markets, having the ability to conduct business via an old-fashioned phone call may save your account. Electronic trading provides equal access to futures and options markets, but technical glitch can render you powerless to make a necessary trade.
Reliable trading software. As a smaller or beginning trader, you may not need the sophisticated, expensive trading technology of a multi-billion-dollar bank. When starting out, you need only look for trading software that provides both depth of market and spread quotes with implied markets. For newbies seeking reliable and affordable trading tech, I recommend Barchart Premier. Designed for the self-directed investor, the Premier option is an indispensable resource for data and charting needs offering excellent functionality for futures and currencies. A solid alternative is eSignal, a well-established charting and trading platform with different plans and pricing options to accommodate novice and casual investors.
Industry-specific news aggregators. When it comes to commodities trading, data and charts alone cannot reveal every detail pertaining to your trades. Relevant news can serve as a real-time resource for current events and weather changes that could drive commodity prices up or down. Staying on top of relevant industry-specific news can be fundamental to maintaining a competitive edge in the commodities market. For coverage on commodity and futures, market platforms like Reuters and Bloomberg are good places to start.
Detailed clearing firm statements. A key part of major exchanges, clearing firms — also known as clearing houses and clearing corporations — oversee nearly all financial transactions in commodities and other financial markets. Clearing firms act as a middleman between two financial parties, ensuring your funds reach their intended destination and lowering the risk in the event your buyer or seller fails to deliver on their obligation.
To track the profitability and risk of different strategies while staying abreast of errors and misconduct, it is vital to regularly review detailed statements from your clearing firm. Statements should include itemized commissions and average position data for both prices and quantities. If your clearing firm’s reports are not as detailed as you’d like, be ready to switch firms.
A willingness for unconventional financial results. When entering the world of commodities trading, a stomach for risk is essential. Compared to conventional markets, trading commodities through futures contracts may involve substantial risk and volatility. As an asset class, commodities tend to be the most volatile due to their vulnerability to weather, natural disasters, and current events.
As a futures trader in the commodities world, expect to be up or down a lot of money in very short time periods. If you are unwilling to risk volatility in your portfolio of around 50 percent, you may not be best suited for trading in futures. On the other hand, if you are willing to take a risk and enter the speculative commodity trading arena, the higher volatility of commodities may translate to greater opportunities for profit.