Commodity futures markets permit commercial consumers and producers to balance the threat of unfavorable future price changes in the commodities they are buying or selling.
A futures contract should be standardized. They ought to include a standard grade and size, terminate at a certain time and have a predetermined tick size.
Commodity trading Benefits
Leverage – Commodity futures work on margin, implying that to get a position just a portion of the whole value needs to be accessible in hard cash in the trading account.
Commission Costs – It is cheaper to sell/buy one futures contract than buying/selling the principal instrument.
Liquidity – The participation of speculators implies that futures contracts are practically liquid. On the other hand, how liquid relies on the actual contract being bought and sold. Electronically traded contracts, for instance the e-mini’s have a tendency to be the most liquid while the pit traded goods like orange juice, corn, and so on are not so easily accessible to the retail dealer and are more costly to trade when it comes to spread and commissions.
Capability to go small – Futures agreements can be traded as effortlessly as they are purchased allowing a speculator to gain from declining markets in addition to increasing ones.
No ‘Time Decay’. Options experience time decay since the nearer they get to expiration the less time it has to change into money. Commodity futures do not go through this since they are not expecting a particular strike value at expiration.
Commodity trading Shortcomings
Leverage – Low margin conditions can promote poor cash management, bring about unwarranted risk taking. Both profits and losses are enhanced!
Reduce speed of trading – Online commodity futures trading help to decrease the trading time by providing the customer with a straight linkage to an electronic trade thus avoiding pit trading.