Trading Commodities: Futures Market for Beginners

Chicago board of trade

With high valuations and increasing uncertainty in the world’s stock markets, it is no surprise that investors are looking for stable alternatives for investing their money. Fortunately, commodities are there to take over as global stocks are losing their appeal, and investors are seeking effective ways for managing risks.

What Are Futures?

Futures contracts are basically financial contracts that obligate the seller to sell an asset or the buyer to buy an asset. The type of asset concerned could be a financial instrument, a commodity, stock market indexes, and currencies, and has a predetermined future price and date of delivery.

The futures contract itself contains details of the quantity and quality of the underlying asset and is standardized so it can be traded on the futures exchange. Some futures contracts call for payments to be made in cash, while others require physical delivery of the asset. The futures markets are particularly well known for their ability to use very high leverage, as compared to stock markets.

For the purposes of this article, we are focusing on futures as an instrument for trading commodities like oil, gold, silver, sugar, or even coffee beans. Lots of commodities and agricultural products are traded in the futures markets, but keep in mind that some of them might not be very liquid.

Marketplaces for Futures Trading

Futures floor trading

There are many marketplaces around the world where futures are traded. A few of them include the New York Mercantile Exchange, the Minneapolis Grain Exchange, the Chicago Mercantile Exchange, and the Chicago Board of Options Exchange.

The futures market is vast in size and typically increase in popularity during choppy times in the stock market.

Benefits of Futures Trading VS. Forex Trading

Some traders might be wondering which market they should choose; forex or futures. The truth is that they both offer some pros and cons. Some of the reasons for choosing futures over forex might be:

  • Liquidity: The futures market is extremely liquid with huge volumes being traded every day. Of course, forex is also a liquid market, but the dynamics of the markets may often be different.
  • Low cost: Futures is actually a very low-cost way of trading, and in some cases it can cost you less in fees than what is possible when trading forex.
  • Reduced screentime: Some traders who have made the switch from forex to futures also say they have managed to reduce the amount of time they spend glued to their screens, while at the same time improving their profitability.

Traders have also experienced that their trading strategies are working better in the futures market than in forex. There is some indication that certain instruments in the futures market are actually responding better to technicals than is usually the case in the forex market.

In fact, some futures instruments such as the E-Mini Nasdaq and E-Mini Dow Jones even have a tendency to trend very nicely during certain hours of the day, providing shorter term trend following traders with great opportunities for making profits.

Choosing a Broker

Futures broker

When you are researching the best futures broker, there are some features you should keep a look out for before you ultimately make the decision. These features include:

  • A transparent fee structure
  • Quick execution of trades
  • Trading platforms are intuitive and fully functional
  • Ability to access several futures exchanges

Some well-known online futures brokers you might want to take a closer look at include:

  • TD Ameritrade
  • Interactive Brokers
  • Optimus Futures

These brokers all have different fees and minimum deposit requirements, meaning you need to go through each of them to make an informed decision regarding which one best suites your particular situation.

Educational Resources

Another great benefit of trading futures is the sheer amount of educational resources available to anyone online. There are huge forums such as that are dedicated to discussing anything related to futures, which can be a big help on the way for a beginning trader. In fact, there are even podcasts like the the Futures Radio Show that talks about all kinds of interesting topics related to futures trading.

As you have probably understood by now, futures trading can be a viable option for many retail traders and offers some real benefits over other markets. It may seem overwhelming at first to get started in futures, but for the traders who constantly strive to learn and improve themselves, chances are the efforts will pay off.

Featured image from Wikimedia Commons/Lars Plougmann.

Fredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.