Commodity Futures Order Types

Wheat Futures Commodity TradingFutures Order Entry Methods

Sometimes it is the small details that make a big difference in futures trading performance. Familiarity with commodity order types and how to properly place each of them, is critical to being a successful trader. Commodity market prices and dynamics are ever-changing, making every second count. Regardless of whether you are trading online via a futures trading platform, or through a commodity broker, knowing the type of order you need to place and placing it accurately is vital.

Communication is the key. If you have questions about the different types of futures orders and how to place them verbally or online, call your broker for assistance. Futures contracts are highly leveraged trading instruments; accordingly, mistakes in order execution are costly! Throughout my lengthy career, I’ve managed to rack up a handful of gut wrenching trade placement errors; some of them well into the thousands of dollars. It is imperative that traders take the steps necessary to keep such errors to a minimum.

Futures Market Bid/Ask Spread

Before discussing order types in the futures market, it is imperative to understand the nature of commodity prices. For any given futures contract, there are essentially two commodity quotes. There is a price at which it is possible to immediately buy the futures contract, and there is a price in which a commodity trader could immediately sell. The price at which traders can buy the futures contract is known as the ask; the price traders can sell a futures contract is known as the bid. The difference between these prices is referred to as the bid/ask spread.
In most futures markets, the bid/ask spread is minimal, but those commodity markets that lack ample trading volume can involve rather wide spreads between the bid and ask. In such markets, order slippage and transaction costs will be much higher than that of a sufficiently liquid futures market. Further, even in some liquid commodity markets, there are certain futures contract expiration months that have less volume than others. For instance, if you are interested in trading the e-mini S&P 500 the front month contract is highly liquid but attempting to trade contracts with expirations several months into the future will likely be inefficient due to a lack of market liquidity. For example, the bid/ask spread of the front month e-mini S&P futures contract is generally 1 tick, or .25 points (equivalent to $12.50) but the bid/ask spread on a contract expiring a year down the road is generally 10 to 12 points, or $500 to $600). In other words, along with the stated commission charged by your commodity broker to enter the trade, the cost of executing in the distant expiring futures contract is several hundred dollars as opposed to $12.50 for the front month.

Those new to trading in commodities, often overlook the hidden cost of the bid/ask spread built into the commodity markets, and all other markets for that matter. Some attempt to buy or sell futures contracts with distant expirations to avoid the commission cost associated with rolling positions over (exiting an expiring futures contract to enter the next contract month to avoid delivery of the underlying commodity); ironically, their quest to save a few dollars in commission can easily cost them hundreds of dollars in unsightly transaction costs such as the bid/ask spread.
You might hear some aged (or perhaps, seasoned is a better word) traders refer to the ask price of a futures contract as the “offer”. Thus, if you hear someone say “bid/offer” you can assume it is synonymous with bid/ask. In addition, if you hear a trader say “the market is offered at” it is equivalent to saying “it is possible to buy the commodity at”.

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