Placing Orders at the Commodities Exchange - dummies

Placing Orders at the Commodities Exchange

Your trading account is your link to the commodity exchange. The broker’s trading platform gives you access to the exchange’s main products, such as futures contracts, options on futures, and other derivative products.

Whether you’re buying a forward contract or engaging in a swap, there are specific entry order procedures you need to follow.

Here is a list of the parameters you need to indicate to place an order at the commodities exchange:

  • Action: Indicate whether you are buying or selling.

  • Quantity: Specify the number of contracts you’re interested in either buying or selling.

  • Time: By definition, commodity futures contracts represent an underlying commodity traded at a specific price for delivery at a specific point in the future. Futures contracts have delivery months, and you must specify the delivery month. Additionally, you should also specify the year because many contracts represent delivery points for periods of up to five years (or more).

  • Commodity: This is the underlying commodity that the contract represents. It could be crude oil, gold, or soybeans. Sometimes, it’s also helpful to indicate on which exchange you want to place your order. (This is fairly significant because more and more of the same commodities are being offered on different exchanges. For example, the benchmark WTI crude oil — which used to be traded only on the NYMEX — is now available both on the NYMEX floor and on the ICE electronic exchange.)

  • Price: This could be the most important piece of the contract: the price at which you’re willing to buy or sell the contract. Unless you’re placing a market order (which is executed at current market prices), you should indicate the price you want your order to be filled.

  • Type of Order: There are a lot of different types of orders, from plain vanilla market orders to more exotic ones such as Fill or Kill (FOK). This is an important piece of the order as this is where you indicate how you want to buy or sell the contract.

  • Day or Open Order: Market orders relate to price, while day or open orders relate to how long you want your order to remain open. In a day order, your order expires if it isn’t filled by the end of the trading day. An open order, however, will remain open unless you cancel the order, the order is filled, or the contract expires.