Commodity Futures Orders, How To Enter A Trade
When you are ready to trade commodities you will need to consider the various commodity futures orders that can be placed in the market.
These futures orders can be issued from your electronic trading platform and are a means of instructing the commodity trading broker to execute your request. Whether you wish to buy a commodity, or go long, or alternatively to sell, that is go short, the various orders must be clear and precise.
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An order is “filled” when funds have transferred and the trader at that point holds one or more futures contracts, bearing the risk of losses as well as being exposed to the potential gains that could arise, depending on the price action movement. Market Order
This is the most common type of the commodity futures orders used on commodity exchanges, and is the route used when traders want to get filled in an efficient manner during the exchange trading hours.
If they are looking to go short (sell) a commodity futures contract then their instruction gets filled at the bid price. If you have received advice that, for example, soybeans are going to rally you would probably use a market order to go long soybeans.
It may well be that the price you eventually get when the contract is confirmed is different to when you got the signal, but this efficient order type gets you into the market.
The faster the market is moving, the greater the difference between the price at the signal and when you are filled is likely to be. Limit Order
If you are planning to buy or sell a commodity futures contract at a better price than is available in the market at that time, you would use a limit order.
Let’s say for example, you want to go long crude oil and the NYMEX WTI futures price at the time was say $102, you might place a buy limit order at $97.
So when the market slides back to $97 your order will be triggered.
Conversely, say you want to go short gold futures and the current price is $750, but you think that it may rally a little before continuing its downward trend. You decide to enter a limit order to go short gold at $755.
Then you sit and wait for that limit order to be filled when the price action moves up to and through $755.
Of course, let’s say that the market continues to fall and gold heads down towards $700 without ever touching $755, then your limit order is not filled and you remain out of the market.
The limit order can either be as an open order or a day order.
Day Order
With this type of order the commodity futures contract will only be entered if it is filled by the close of business on that specific trading day. Unless a trader specifically asks for an order to be open, it will be treated as a day order.
This order will remain active until such time as it is filled or cancelled or the contract expires. Another term used to describe this process is Good Til Cancelled or GTC.
As a trader remember to keep track if you are entering open orders, as they may accumulate and then you could receive a shock when suddenly a number of orders have been filled and you have gone beyond your margin position.
Bear in mind the following points about a Limit Order Limit orders work well for you as a commodity futures trader if your strategy sets out what you will trade, where you trade, when you plan to enter and where you aim to exit for a profit. There is no guarantee that orders can be executed when placed because the price may never touch the selected limited price.
Even if the market touches that price, there may be a large number of orders to be filed before your order. When your order is eventually filled the price may be very different to the point you had chosen as an entry point.
Stop Order
Commodity trading markets can be very volatile and one way to limit potential losses is to place a stop order or a stop loss.
While some commodity traders believe in using a “mental” stop loss trading strategy, most traders will use a real stop order as part of their trading protection mechanism.
A futures contract for crude oil would be 1,000 barrels at $100, which is $100,000. So a stop loss at $94 would limit the loss in this case to $6,000 if the price fell.
Your commodity trading plan has to build in an amount of capital you would be prepared to lose if the market goes against you. Without a stop loss order a commodity trader could, for example, go from a potential profit of $2,000 to a loss of $5,000 because they expected the market to recover and move in the direction they had predicted. Summary
The above describes the main commodity futures orders used by traders who enter the exciting commodities markets. They are a very important and helpful tool to manage the trades and to minimise potential losses of trading capital.
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