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What is Commodity Day Trading?

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  • Written By: Jason C. Chavis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 November 2018
  • Copyright Protected:
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    Conjecture Corporation
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The practice of buying and selling commodities over the course of a single day is known as commodity day trading. Unlike other day traders who operate in the general financial instrument market, these traders focus on products that are the same no matter who produces them. Across the market, there is no differentiation that can be qualitatively determined between each product line.

Types of commodities that a day trader may leverage include food, oil and paper. While the prices for stock in the individual companies that produce these materials can rise and fall according to the success of the market, commodities themselves are traded in bulk. For example, an oil company's stock can fall over the course of the trading day, while the price for oil rises. The commodity market exists throughout the various stock exchanges around the world.

The particular concept of commodity day trading is to make all desired changes to an investor's position within the time frame of the trading day. A trader will identify any commodity that, by his or her judgment, has the best chance of accelerating in price. In this way a day trader maximizes the value of the stock purchase from opening until close. There is no limit to the amount of adjustments over the course of the day.

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Commodity day trading is considered by many other investors as a form of gambling. This is because the concept can result in heavy losses or substantial gains for the investor. Commodity investing can have major negative effects on a person's portfolio if certain standards are not continually managed. If a day trader ignores strategy, tactics and personal rules, the likelihood of failure is increased. In addition, commodity trading requires adequate levels of risk capital that can be lost if need be.

A commodity trade is usually bought on margin, meaning it uses borrowed funds. This maximizes the potential for gains or losses and causes them to occur in a short period of time with commodity day trading. A normal overnight margin generally requires a position of 50 percent of the stock's value. For a commodity day trader, usually a maximum of 25 percent is needed for purchases that occur within the day. This allows a day trader to use only $25,000 US Dollars (USD) to buy $100,000 USD worth of stock. However, this requires the trader to constantly monitor the commodity market, forcing him or her to possibly pull from the investment very quickly in order to mitigate a major loss.

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