Once you get the hang of trading one market, equities, for example, it's tempting to think you will seamlessly switch to another like commodities. But unless you do your homework, such a move could quickly go pear-shaped. Here are four traps for the unwary.
Many commodities markets for silver, say are much smaller than the market for a currency such as the dollar or an index such as the FTSE 100. So prices can spike and dip quickly. If in doubt, trade small amounts initially and use stop losses.
Anyone used to trading, for example, the FTSE 100 index will be also used to betting, say, £1, or 3% or £10 for every one-point movement in the index. But watch out when trading commodities or currencies, as the minimum movement on the contract for pricing purposes (the 'tick' size, or 'pip' size in forex) may be much smaller. Get this wrong and your losses will rack up much faster than you expect.
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Out-of-hours trading is possible in most markets, but spreads are often wider when the main market is closed. So always check with your broker. Also, get to know which contracts are most liquid, and therefore attract the lowest spreads. In the forex market for example trades involving combinations of sterling, US dollars, euro, yen, Canadian, Kiwi and Aussie dollars tend to be the cheapest.
Most commodity contracts have different expiry dates. These might be the last Friday in the third month for a standard financial contract with quarterly expiries (March, June, September and December). However, some commodities expire monthly, and others will not even expire in the contract month so an 'April' contract will often expire in the last week of March. Knowing this will help you avoid paying unnecessarily to 'roll over' a contract into the next expiry month.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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