Trading Rules From Your Commodity Broker
I put this list together from my personal experience as a Commodity Broker to help clients make informed trading decisions.
Figure Out the Current Market Cycle
Identify the the direction and/or the existence of the trend visually before applying any technical indicators. Often times traders begin applying trending indicators to range bound markets and oscillators to trending markets. Before you apply any indicator, step back and look at the chart visually to see the cycle the market is in.
Ask Your Commodity Broker About Different Oscillators
If you see a strong trend ask your Commodity Broker to show you some charts with moving average indicators. These indicators tend to work well when markets are trending. Conversely, if you see the market is not moving strongly either up or down, then you may want to use an Oscillator such as an RSI or Stochastic indicator instead. Ask your Commodity Broker about the different Oscillators that are available and how to best use one for the Commodity market you choose to trade.
Watch the Morning Volatility
The most volatile time for most Commodities as well as most financial markets is the first half hour of the trading day. This is why it’s important to either use limit orders, especially during the first half our of the trading day or simply avoid trading during this time period.
Ask Your Commodity Broker to Place Limit Orders
During the first half hour of the trading day, many traders are looking for clues as to the market direction for the rest of the trading day. This is why during this period, there is added speculation and markets are moving quicker than usual. So if you trade during this period of time, make sure to tell your Commodity Broker to place limit orders on your behalf. This way your risk of getting a bad fill will be minimized to the limit you are willing to pay.
Monitor Options Expiration’s and Margins
Many Commodity Traders prefer to trade Options instead of Futures contracts. While Options premiums and limited risk may seem lucrative and desirable to some traders, there’s always the dreaded time decay factor.
Ask Your Commodity Broker for Monthly Options Expiration Calender
Options can melt away like ice and no one knows exactly how long it will take for the market to reach your profit target. Therefore, you should always ask your Commodity Broker for the Options expiration calender before you execute options strategies.
As a general rule I recommend buying options that have less than 60 days till expiration because the time decay really begins to speed up around day 45. The more decay the Commodity options experience the less correlation they will have to the actual market and the less impact the market’s movement will have on the Option.
Ask Your Commodity Broker for Margin Requirements
You have to remember that margin or the security deposit for each contract goes up and down as the volatility and trading range changes. If markets are quiet for extended periods of time the margin may change very infrequently. However, if the market is moving fast the margin requirements may change as often as weekly or even daily in extreme circumstances.
This is why it’s very important to always have the most current margin requirements so that you can plan your position size accordingly. Nothing is more frustrating than getting a call from your Commodity Broker who tells you that your margin is not sufficient and that it was raised two weeks ago.
Always have an updated margin sheet or ask your Commodity Broker to update you at least weekly with margin updates for the markets that you actively trade.
Avoid Commodity Trading During Holidays
One thing most traders need to consider is the lack of liquidity and market movement during the Holiday season. If you look at volume data over many years for major Commodity groups, you will notice a sharp drop in volume during the last few weeks of August and the last few weeks of December.
During the Holiday season many floor traders as well as large commodity broker firms take time off and as a result there is less liquidity in the financial markets. The decrease in liquidity causes spreads between the bid and the offer to widen and trade execution prices suffer as a result. Therefore, I highly recommend you sit it out and wait till after the Holiday season to begin trading.
Pay Attention to Fundamentals
Many Commodity Brokers rely purely on technical indicators and chart patterns for the majority of their analysis. However, many important clues can be gained from paying attention to basic supply and demand data that comes out weekly. Commodity markets are still very much driven by weather, supply and demand numbers and many professional traders use this data in addition to charting patterns and technical indicators.
Ask Your Commodity Broker for Fundamentals
Most Commodity Broker Firms subscribe to daily and weekly market update newsletters. Ask your Commodity Broker to send you a few different reports, so that you can get familiar with the numbers and begin using them in your daily market analysis.