Day Trading Commodities: Commodities are traded on exchanges throughout the world. Some of the more well-known exchanges are the Chicago Board of Trade, Chicago Mercantile Exchange, Intercontinental Exchange, Atlanta New York Mercantile Exchange, NYSE Liffe, London Metal Exchange and Tokyo Commodity Exchange. Exchanges in China and India are also growing in importance with increased consumption of commodities in these countries.
Commodities are bought and sold on the cash market and they are traded on the futures exchanges in the form of futures contracts. Originally the entire futures industry was related to the agricultural markets. Today futures trading exist for many physical commodities such as:
Soft commodities like cotton, orange juice, coffee, sugar, cocoa and lumber;
Grains (also soft commodities) like wheat, corn, soybeans, soybean meal, soybean oil, oats, rough rice and canola;
Metals (hard commodities) like gold, silver, copper, platinum and palladium;
Meats like live cattle, feeder cattle and lean hogs;
Energy commodities like Crude Oil, Heating Oil, Gasoline, Natural Gas and Ethanol.
The Chicago Board of Trade (CBOT), established in 1848, was the first modern futures market forDay trading commodities. Chicago was a logical centre of trade between the farmers and producers in the US mid-west and the large population of consumers on the east coast. Futures markets used to be traded open outcry by brokers on the floors of the exchanges but today can be traded electronically from anywhere in the world.
The spot market or cash market is used for the immediate delivery of a commodity. Alternatively the futures market allows participants to enter into a contract to receive or deliver the underlying commodity at a specified date in the future. A futures contract is a standardised quantity and quality of an underlying commodity. One advantage of this for buyers of commodities is that they don’t have to inspect the produce. The terms of the contract are standardised. However, only a small percentage of futures contracts are actually delivered on. Participants in the futures market typically use them for hedging and speculation.
Hedging allows producers and consumers of commodities to limit their risk. It performs an important economic function because it allows producers and consumers to introduce more certainty into their businesses which are based onDay trading commodities that can be extremely volatile.
A corn farmer might like the price of soybeans at $6.50 per bushel. Bushels on agricultural markets are a unit of weight assigned to each commodity. A Corn futures contract is for 5000 bushels (127 metric tons). The farmer knows he/she can make a profit at $6.50 per bushel but worries that the price of corn will fall between now and harvest time in two months. Selling corn futures will help to limit risk and secure a predetermined price for the corn. The farmer is guaranteed to receive that price in the future.
At harvest time corn is trading at $6.00 per bushel and the farmer has to settle up their positions. There are two ways to do this. They can deliver on the futures contract and receive $6.50 per bushel. However, the cost of transporting the corn to the assigned location may be prohibitive. More likely the farmer will sell the corn at the current price of $6.00 through the local channels. However, they can buy back the futures contracts at $6.00 at a profit of 50 cent per bushel offsetting the decline in prices.
What would happen if the price of corn had gone up to $6.75 per bushel. They would lose 25 cents per bushel on the futures contract but offset the losses by selling the harvest at the higher price.
The other major participants inDay trading commodities are speculators. The speculator does not produce or consume commodities but risks capital hoping to profit from the movement of the underlying asset. A trader expecting a rise in commodity prices may buy a futures contract in the hope of selling it at a higher price. Traders can also “short” commodities by selling a futures contract and buying it back at a lower price. Speculators provide liquidity in the market. A producer or consumer who needs to hedge on the futures market can do so in the near certainty that they can exit their position at any time because the market is so liquid.
Each futures contract has its own specifications which are easy to find out through a broker or on the internet. Examples of contract specifications are given for the Dow Jones Industrial Average (Futures Trading) and for the EUR/USD (Currency Trading). As an example of a physical commodity, the contract specifications for Soybeans are:
Ticker Symbol: ZS on electronic platform (The ticker symbol is used by the exchange to identify the contract)
Contract Size: 5000 bushels (136 metric tons)
Pricing Unit: Cents per bushel.
Tick Size: ¼ cent per bushel ($12.50). This is the minimum price fluctuation possible.
Trading Hours: CME Globex Electronic Platform - 5:00 pm - 2:00 pm, Sunday - Friday Central Time
Open Outcry on Trading Floor - 9:30 am - 2:00 pm Monday - Friday Central Time
Contract Months: January (F), March (H), May (K), July (N), August (Q), September (U) & November (X).
Last Trade Date: The business day prior to the 15th calendar day of the contract month.
Traders should know the contract specifications for the market they are going to trade. Other specifications apply such as margin requirements and the limit of price moves permissible.
Each futures contract has a pricing unit or tick size. A trader who buys one Soybeans futures contract at $14.00 per bushel and sells it at $14.50 would make $2500 (200 ticks x $12.50) not including commission. If the market declined and the contract was sold it at $13.00 the loss would be $5000 (400 ticks x $12.50). A trader could also go short and sell one contract at $14.00 per bushel. Buying it back at $13.75 would yield a profit of $1250 (100 ticks x $12.50).
Futures offer high leverage, high liquidity, low transaction costs, the ability to go long or short and portfolio diversification. However, futures can be very volatile and the high leverage requires effective risk management otherwise large losses can result. Traders may make use of Fundamental Analysis, Technical Analysis Indicators and Chart Patterns whenDay trading commodities.
Futures are not the only method ofDay trading commodities. Exchange Traded Funds (ETFs), Contracts for Difference (CFDs), Spread Betting, commodity based funds or stocks of companies based onDay trading commodities also provide access to the commodities markets.