How to Start Trading Commodities Online
Trading commodities online is a relatively simple process, but it is not an activity that you should pursue without doing lots of homework. The traditional method of calling a commodity broker to place orders and waiting for a call back to give you a filled order price is less efficient than online trading. Therefore, if you want to trade commodities online, there are some important factors to keep in mind.
Choosing a Commodity Broker
The first job is to pick a commodity broker. Almost all commodity brokers offer online trading, but there are some that specialize in online trading. TradeStation offers one such platform. TradeStation offers a versatile trading platform when it comes to charts, quotes, strategy analysis, as well as order entry. Many other online brokers offer an excellent product, good service, and low commission rates. Two other examples are Interactive Brokers and Options Express.
Commodities Account Paperwork
Every commodity broker requires documentation to open an account. The forms require disclosure of financial information and identify the risks involved in trading commodities. Financial data is critical because commodities are highly leveraged assets, there is always a chance that one can lose more money than initially invested. Therefore, a broker requires information on income, net worth, and creditworthiness.
Not everyone who completes the account forms is suitable to open a commodities account. A broker may use discretion on whether a potential customer is an acceptable risk and is suited to trade commodities. Sufficient income, trading experience, and credit are critical elements of suitability
Before You Start Trading Commodities Online
Once you select an online commodity broker, and you receive approval for trading, the next step is to fund the account. It is up to the individual as to the amount of funding or account size when you open an account. One's comfort level and risk tolerance are important considerations when funding an account.
Before you commence trading with actual money, it is important to develop a well-researched trading plan. Many commodity brokers offer simulations to practice with before you put capital to work. Training and simulations will familiarize you with placing orders and could save the prospective trader from making critical order entry errors while helping with the development of a coherent and efficient plan for approaching markets.
Keep in mind that before you begin trading commodities online, choose your trades wisely and avoid overtrading. If you find yourself placing many trades, and the results are not profitable, it is likely that you are overtrading. One of the greatest downfalls of many commodity traders is not being selective and doing too many trades.
More Advice for the New Online Commodities Trader
As with any new venture, you must do your homework and understand the ins and outs of the markets you decide to trade. When it comes to commodities, there are so many important factors to consider. First, remember that futures and options markets are derivatives of the actual market for the physical delivery of the commodity in question.
Therefore, it is important to learn all you can about the underlying supply and demand fundamentals for that asset. There is a wealth of information available for free from the commodity exchanges as well as from a variety of trade organizations and government agencies that supply commodity data free of charge.
In the energy markets, the API and EIA are excellent sources of information. In grains, soft commodity, and animal protein markets, the U.S. Department of Agriculture issues weekly and monthly reports that include invaluable data and analysis.
Understanding commodities will require particular attention to supply and demand or fundamental analysis. At the same time, the futures and options markets in commodities are laden with risk. There is a tremendous amount of leverage in these instruments. While the opportunity exists to make huge gains, where there is the potential for rewards there are also commensurate risks.
Trading futures requires a good-faith deposit or margin. In many cases a trader, speculator, or investor can control vast amounts of a commodity and bet that the price is going higher or lower with a 5–10% margin deposit or less. However, given the gearing of these contracts and the volatility of the markets, margin calls requiring additional capital are likely. When it comes to options, buyers have time value risk, and sellers act as insurance companies, they risk a lot for small potential profits.
Exercise caution in the commodity markets, do your homework, and approach these volatile instruments with care and trepidation. While fortunes can come from commodities trading, the potential for losses is just as great. Online trading has increased the speed and efficiency of execution. Remember to approach online trading as a business with discipline and be precise. Mistakes can be very expensive so try to keep trading to a minimum.
The most successful traders are masters of efficiency. Mastering online trading requires a level of expertise that comes from hard work and study. Most online trading platforms have many resources for their customers. Make sure you use all of the information that is at your disposal. The platforms want you to succeed because a successful customer is one who will be in the markets and trading for the long haul.