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Commodity Trading

commodity tradingWhat is commodity trading? Commodity markets are markets where individual groups of goods and raw materials are traded. Currently, approximately 70 types of commodities are traded internationally. Commodity trading accounts for about 30% of international trade. These products include metals (gold, silver, platinum, copper, aluminum), soft goods (coffee, sugar, corn, soybeans, wheat) and energy sources (oil, gas, heating oil).

What is Commodity Trading Advisor?

The 21st century is a time of rapid optimization of all the processes taking place in the life of mankind, in particular automation. It would be foolish to abandon something like this when trading in financial markets. Commodity trading advisor is one of those optimization solutions. Today, more and more successful traders decide to trade with the help of trading advisors and there are several reasons for this.

  • Continuous trading. A trader can be busy with completely different things: starting from the main job and ending with rest or sleep, but at this time the trading advisor works 24 hours, bringing profit to the account holder.
  • Automatic leveling of the human factor effect on trading. Experienced traders know this and constantly note that the long daily trading time and the work on the same type of transactions very badly affects the efficiency of the trader’s work because fatigue significantly worsens the decision-making capability. Moreover, shifting all the routine work on the shoulders of a trading advisor, the trader gets additional free time to assess their trading strategies, eliminate shortcomings in it and also search for more profitable and efficient ones.
  • Ability to customize trading advisors for each trader. A large number of commodity advisors available have a flexible system of settings. Moreover, some of them are designed to carry out transactions on a particular currency pair. For example, the Tokyo GBPUSD trading advisor is built in such a way that it conducts trading on the British Pound/US dollar pair exclusively during the Asian trading session. A feature of this pair is that due to the large hourly difference between the Asian and European markets, there is no timely news on the ratios of these currencies, so the price change occurs solely under the influence of supply and demand. Therefore, the Tokyo GBPUSD Expert Advisor works only on analyzing the behavior of other traders.

All trading advisors have an ability, using various methods, to track and analyze information signals of the market, and also to search for the most appropriate options for opening/closing an order on the basis of the information received. It is worth noting that the ideal adviser does not exist and probably will never appear. Knowledgeable traders never make a deal using one trading advisor. As a rule, they use complementary trading advisors to make decisions and perform transactions.

Online Commodity Trading

One of the main elements of the market economy today are commodity trading platforms. Commodity trading companies create the commodity trading platform, where sellers and buyers can meet and exchange commodities. The main functions of the commodity exchange platform are:

  • development of standards for goods sold through the exchange;
  • development of a package of standard contracts for purchase and sale transactions;
  • price quotation for goods sold on the stock exchange;
  • studying and forecasting consumer demand;
  • creation of conditions for stabilization of prices and proportions of exchange;
  • organization of commodity exchange operations based on reciprocity based on real supply and demand;
  • informational activities (provision of commercial and other information about goods sold on exchanges to participants in exchange trades and other interested parties).

Commodity exchanges are classified according to the following criteria:

  • According to the nature of the activity, i.e. by purpose:
    • Specialized – those which specialize in certain types of commodities: sugar, coffee, cocoa, cotton, oil, metal, etc. (London Wool Exchange);
    • Universal – those which carry out operations not only with commodities, but also with valuables that are not goods in the usual sense — currency, mortgage, securities, freight contracts, etc. (New York Mercantile Exchange).
  • According to the degree of user participation in exchange trading:
    • Open — besides brokers, other users can also participate in the commodity trading online;
    • Closed — only brokers take part in the online commodity trading. Modern commodity exchanges are mostly closed.
  • According to the nature of stock exchange transactions:
    • The sale of forward contracts on the platforms of commodity trading firms at a specified price in the future that is accompanied by the mandatory delivery of goods.
    • Commodity options trading – what sets commodity option trading apart from other contracts is that the option buyer has the right, without obligation, to buy or sell an underlying asset in the form of a commodity at a specified price until a designated date.
    • Commodity futures trading that provides for the supply of real goods by a predetermined time limit at the time of the transaction. Such transactions create the possibility to speculate on the price difference because they are carried out not with the goods, but with the right to the goods.

A futures contract is a standardized contract, as opposed to a forward contract that is a private agreement between two parties. A futures contract is a contract for a product that has not yet been produced and it does not end with the delivery of goods, but with the ending of the contract. The following features are characteristic of futures:

  • a fictitious nature of transactions that end with the payment of the difference in prices, and only a small number of transactions — the supply of real goods;
  • unification of all contract terms (except for commodity trading prices) in relation to the quantity of goods allowed for delivery, the place and time of delivery;
  • impersonality of transactions, as they are not done between a specific seller and buyer;
  • indirect connection with the market of real goods through hedging and not through the delivery of goods. Hedging is a form of price risk insurance, usually carried out as a result of buying or selling a futures contract.