By Don Dawson, Online Trading Academy Commodity Futures Instructor

Before we start, I would like to share with you a story that I think happens more than we actually hear about in trading.

I attend a monthly Traders Meet-up where I meet all different types of investors/traders. At one of our meetings I exchanged contact information with someone interested in Commodities. A gentleman who had only traded some stocks before had taken a fancy to the Soybean market. About a week later I get an IM (Instant Message), asking "what time does the Soybean market close?" I replied "about 20 minutes ago." He then went on to ask what each tick was worth. By now I am a little nervous so I asked him if he had a position on. He was short 2 Soybean contracts with a loss of 10 cents each. At $50 per cent he was down $1,000. On any given day this would have been bad enough. To add to his problems the very next day was the monthly Supply/Demand Crop Report that is released before the market opens, which has a market impact much like that of the monthly Unemployment Reports jolt on the Stock market. I advised him of this report and recommended he bailout of his position on the Globex session when it opened in a few hours. Now the Soybean Globex session is very thinly traded (no liquidity). He did exit with a gap against him on the Globex and very bad slippage with a loss of about $1,500. This is just one example of why I try to get students to understand the mechanics of each market they trade.

Another observation you may note in my articles and classes is that I refer to pit trading still. This is where it all began and will eventually be phased out. But for now, the pits are still here and tradable. Let's think about electronic markets for a minute. As good as they are, they are not perfect. That one time you are in a Corn trade on the Globex platform and the system goes down, you will be happy to know that the pits are still there. You see, just because the Globex platform goes down does not mean the trading stops. Oh no, the pits keep right on trading and prices can keep going against you even if you have a stop in the market. By having an understanding of how the pits work and having a broker that has pit access, you could very easily have him call the pits for you and offset your trade or place a protective stop in that market for you. I hope you see the value to this "non-sexy" form of trading that can save you some money in the future.

While trading Commodities you will usually be buying or selling the futures contracts on the particular Commodity rather than trading the Commodity directly. Futures trade very similarly to Stocks and Bonds with the major exception that futures have expiration dates. Some of the mechanics of trading can still be confusing to those starting out in the Commodity arena. Let's break down some price quotes of different Commodities.

Agricultural – Corn

• Trades on the CME Group Exchange www.cmegroup.com
• Symbol: Pit Session - C Electronic Session – ZC

Corn has been trading since the middle of the 19th century.

Corn prices are quoted in cents per bushel and a minimum tick value of .25 cent. Commodity futures contracts are standardized and Corn's contract size is 5,000 bushels. When you read a price quote for Corn it appears as 310-0 and means $3.10 per bushel of Corn.

If Corn prices trade from 310-0 to 311-0 that would be a $0.01 per bushel change.

$0.01 X 5,000 = $50 per contract.

Since Corn is quoted in .25 cents, the fractional prices are displayed as the following:

To find the Minimum Tick Value for Corn

Minimum Tick Size X Contract Size = Minimum Tick Value

.0025 X 5,000 = $12.50 per tick

Metals – Gold

• Trades on the New York Mercantile Exchange www.nymex.com
• Symbol: GC

Most traders are attracted to the Gold market due to advertising, ease of purchasing the spot metal and its correlation to the dollar.

Gold prices are quoted in dollars per troy ounce and have a minimum tick value of .10 cent. The Nymex exchange standard contract size is 100 troy ounces. Prices from the exchange appear as 750.3 and means $7.503 per troy ounce.

If Gold prices trade from 750.3 to 751.3 that would be a $1.00 per troy ounce change.

$1.00 X 100 = $100 per contract.

To find the Minimum Tick Value for Gold

Minimum Tick Size X Contract Size = Minimum Tick Value

.10 X 100 = $10.00 per tick

Energy – Crude Oil

• Traded on New York Mercantile Exchange www.nymex.com
• Symbol: Pit Session – CL Electronic Session – QM

Crude Oil is the world's largest-volume futures contract trading on a physical commodity. Contract calls for Light Sweet Crude delivery because refiners prefer the low sulfur content and high-yields of gasoline, diesel fuel, heating oil and jet fuel.

Crude Oil prices are quoted in U.S. dollars and cents per barrel and a minimum tick size of $0.01 for CL. When you read price quotes for CL it appears as 40.80 and means $40.80 per barrel. CL is the full size contract of 1,000 Barrels (42,000 Gallons).

If CL prices trade from 40.80 to 40.95 that would be a $0.15 per barrel change.

$0.15 X 1,000 = $150 per contract.

To find the Minimum Tick Value for CL

Minimum Tick Size X Contract Size = Minimum Tick Value

.01 X 1,000 = $10.00 per tick

If QM prices trade from 46.250 to 46.500 that would be a $0.25 per barrel change.

$0.25 X 500 = $125 per contract.

To find the Minimum Tick Value for QM

Minimum Tick Size X Contract Size = Minimum Tick Value

.025 X 500 = $12.50 per tick

I wanted to show you just a few examples of different Commodities so you will see that each one has their own unique specifications and pricing structure. Unlike Stocks where if you buy General Motors, you pay in $0.01 per share increments just like you would with American Express or any other Equity. Commodity prices are notorious for being fast and have very large single day moves. I hope you take the time to study each Commodity you trade so you don't end up like the gentleman trading Soybeans.

As we wind down the year, I would like to wish each and every one of you a very happy and safe Holiday Season.

Trading is the hardest easy money you will ever make,

- Don Dawson

DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

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