Online Commodity Trading – Understanding the Basics and Strategies
If you are planning to start trading commodities online, understand that while it’s a relatively uncomplicated process, you cannot do it without doing a great deal of homework. The traditional technique of giving a call to a commodity broker for placing orders on your behalf and keeping waiting for a call back to inform you about a filled order cost is proven to be less efficient than online trading. Hence, if you are planning to trade commodities online, you should keep a few important factors in mind.
Selecting a Commodity Broker
Your first job should be to select an excellent commodity broker, someone like Stock Straight Through Processing. Nearly all commodity brokers provide online trading. However, there are some that specialize in online trading. Check if the broker you find is versatile when it’s about strategy analysis, quotes, charts and even order entry. Check also if they offer a good service, excellent product and low commission rates.
All commodity brokers need documentation to open an account. Financial information is to be disclosed in these forms and the risks involved in trading commodities should be identified. Financial information is critical since commodities are greatly leveraged assets. So, a risk always exists that more money can be lost than originally invested. Hence, a broker needs information on net worth, income and credit worthiness.
You should also remember that not everybody who fills in the account forms is considered suitable to open a commodities account. A broker may be discreet about whether a would-be customer is a risk that can be acceptable and is suitable to trade commodities. Some important criteria of suitability are trading experience, adequate income and credit.
Before Starting Trading Commodities Online
Once you complete the process of finding an online commodity broker and also get approved for trading, your next step should be to fund the account.
It depends on personal preference as to the size of the account or amount of funding when one opens an account. Here some important considerations while funding an account are your risk tolerance and comfort level.
Before you start trading with real money, it’s essential to design a trading plan based on thorough research. Several commodity brokers provide emulations for practicing with, before you invest actual capital to work. Such simulations and training are two important steps that will familiarize you with placing orders and can save you from making critical order entry mistakes while at the same time helping you develop an efficient and intelligible plan for approaching markets.
Remember that prior to starting trading commodities online, select your trades carefully and stay away from overtrading. If you see that you placed several trades and are not getting profitable results, there are chances that you are overtrading. It’s one of the largest downfalls of several commodity traders of not being careful and doing too many trades.
Something that New Online Commodity Traders Should Remember
Like any new venture, a lot of homework is essential in commodity trading to understand it thoroughly. And when it is about commodities, there are a lot of important factors to take into consideration.
First off, keep in mind that options and futures markets are derivatives of the real market for the physical delivery of the respective commodity.
Hence, it’s essential to study everything you can, regarding the underlying demand and supply basics for the asset. A wealth of free information is available from the commodity exchanges and also from a range of government agencies and trade organizations that provide commodity data free of cost. You can also take help of Stock Straight Through Processing for getting all the necessary information.
Understanding commodities will need specific attention to demand and supply or fundamental analysis.
You should also keep in mind at the same time that the options and futures markets in commodities are full of risk. A huge amount of leverage exists in these instruments. Though there is an opportunity to make big gains, there are corresponding risks too.
Trading futures need a good-faith deposit or margin. In several events, a trader, investor or speculator can have a control on high amounts of a commodity and speculate that the cost is going lower or higher with 5 to 10% margin deposit or less. Nevertheless, because of the volatility of the markets and the gearing of these contracts, margin calls needing extra capital are likely. When it’s about options, there is a time value risk for buyers and sellers play the role of insurance companies. They risk a great deal for small potential profits.
Caution should be exercised in the commodity markets, homework should be done and these volatile instruments should be dealt with care and concern. While commodity trading can offer fortunes, there are equal chances for losses. There is an increase in speed and efficiency of execution due to online trading. Keep in mind to deal with online trading as a business to be done with discipline and precision. Errors can be very costly; so, try to trade to a minimum.
You may see that the most successful traders are highly efficient. Becoming an expert in online trading needs a high level of knowledge that can be achieved from intense study and hard work. Most online trading platforms offer several resources for their clients. Ensure you make use of all the information that is available to you. These platforms want you to gain success because a successful client is one who will sustain in the trading and market for the long haul.
Types of Strategies of Commodity Trading
Commodity trading strategies are planning for purchasing and selling commodity options and futures to gain profit from the changes in costs. It’s essential to build a strategic plan before you start trading commodities and put your capital to risk.
Only keeping in touch with the financial news and reading a commodity publication to get the most recent trading tips will not provide a trader the required skills to get success in the commodity trading.
Nevertheless, steady strategies that you examine through emulations over time will enable you to know risks and rewards along with the volatile nature of the markets.
Here are three basic strategies of commodity trading each of which has its pros and cons. So, it’s best to choose one according to your liking. Using a variation can also work well for some traders.
Range Trading Strategy
Range trading in commodities just refers to trying to make purchases close to the bottom end of a range (support) and sell at the top of that range (resistance).
The ability to purchase a commodity after selling at the price fall to an oversold condition determines the success of this strategy. Oversold refers to the fact that the market soaked up all selling and purchasing has chances to emerge. On the other hand, one might look forward to selling a commodity after a long rally that brings the price rise to an overbought condition where the purchasing falls and selling rises.
Many indicators exist which gauge oversold and overbought levels, such as Momentum, Relative Strength Index, Stochastics and Rate of Change metrics. When the market has consistent and definable trend, these strategies work fine. However, there are chances that the markets can stay in an oversold or overbought condition for long. The risk in the range trading strategy is that the market shifts above resistance or below technical support.
This strategy means that a trader will plan to sell a commodity when it makes new lows or buy a commodity when it makes new highs. You can easily spot new lows and highs on a chart, as they are the peaks and troughs of earlier moves. These techniques are used by several professional traders when they manage huge amounts of money and waiting for a major trend to emerge.
Commodities are volatile instruments and it’s not unusual for them to half or double the cost or more over comparatively short time spans.
There is a simple philosophy for this strategy – a market is unable to continue its trend without making new lows and new highs. When trends are powerful and long-lasting, this strategy works well. It makes no difference as to whether a trend is down or up, since the trader is selling (shorting) at new lows and purchasing at new highs. A critical downside of this strategy is that it works poorly when the markets are unable to set powerful trends and trade in ranges.
Fundamental Trading Strategy
While trading breakouts or ranges typically have particular rules as to when to purchase and sell, fundamental trading depends on aspects that will influence demand and supply for the concerned commodity.
Investors and traders that are new to the markets may face difficulties with fundamental trading as it needs a huge level of homework as well as number crunching.
If you are finding it difficult to study the markets and online commodity trading, Stock Straight Through Processing is always there to help you out. Take help of them and look forward confidently to succeeding in online commodity trading.