Glossary

In our commodity trading vocabulary you find some common words used in the industry. Feel free to send us suggestions for more words to be added in the end of this page.

Algorithmic Trading

Trading commodities strictly based on buy and sell decisions of computer algorithms are often referred to as quantitative trading, high frequency trading or algorithmic trading. By using computer programs and historical performance data, new algorithic trading robots can be backtested before going live. Not seldom, it’s based upon data from technical analysis and fundamental analysis combined.

Arbitrage

Commodity trading strategies with multiple positions in various markets, currencies and/or instruments, trying to benefit from a price discrepancy.

Ask Price

The price level a commodity broker offer or sell a commodity for, as in bid-ask spread.

Basis Price

The difference between spot or cash price of a certain commodity, and the similar future contract next to expire. It’s calculated as the cash vaue minus the future value.

Bear Market

A market condition where prices in general are declining, often during several months or even years.

Bid Price

The price level a commodity broker are prepared to buy a commodity for, as in bid-ask spread.

Buoyant Market

When prices tend to rise easily, with considerable strength.

Bull Market

A market condition where prices in general are increasing, often during several months or even years.

Carry Trade

A type of forex or commodity trade where one borrows a currency or commodity with a low cost of carry (ie: low interest rate), while lending a similar instrument with a high cost of carry (ie high interest rate). The goal of carry trading is to do trading profits from the differential with a low risk.

Commodity Exchanges

Commodity exchanges are typically trading floors setup for exchange of commodities. Can be used as trading points for everything from farmers to traders and exporters.

Commodity Futures Trading Commission (CFTC)

American Federal regulator established by the Commodity Futures Trading Act of 1974.

Commodity Index

A basket of physical commodities or commodity futures, often used as a benchmark for commodity prices.

Derivative

Financial instrument which value is based on underlying commodities, securities, equity indices or debt instrument. Commonly used to exchange a floating rate of return for a fixed rate of return, or to hedge risk. Commodity futures, options and swaps are examples of derivatives.

Differentials

When a premium are paid for different location or grade of a commodity in a futures contract, it’s referred to as a differential.

ECN

Electronic Communications Network, or ECN, is frequently used by professional traders in the stock and futures markets. Bloomberg is the largest ECN today in terms of daily volume for the commodity trading market.

E-Mini

A mini sized commodity future contract, which are traded exclusively online. E-Mini is a trademark of the CME Group.

ETF

EFT’s or ‘Exchange Traded Funds’ are an investment company holding a commodity or other asset. EFT’s are traded similar to stocks or securities.

Financial Commodity

If a option, future or spot commodity contract is not based on agricultural commodity, natural resources or tangible or physical commodity, it’s referred to as a financial commodity. Common examples are currencies, various indexes and income securities.

Forced Liquidation

Under some occations, a commodity broker might liquidate an open position. Forced liquidation or margin calls are done when the account holder have to low deposit in the account.

Forex Trading

Foreign exchange transactions are often called Forex or forex trading. It may be done on spot basis or with future contracts. Forex can be traded 24 hours a day from Monday to Friday. Here you can read more about forex trading online.

Fundamental Analysis

Studying of underlying factors, affecting supply and demand, such as news and economic data from central banks (inflation reports, speeches, CPI etc.) are classified as fundamental analysis.

Futures Contract

A futures contract is an agreement to purchase or sell a commodity for delivery in the future,
(a) at a price determined at the creation of the contract;
(b) with obligation for each party to fulfill the contract at a specified price;
(c) that may be satisfied by delivery or offset.

Futures Industry Association (FIA)

Organisation with required membership, offering education courses, information and lobbying for Futures Commission Merchants (FCMs). Website: www.futuresindustry.org.

Gold/Silver Ratio

How many of ounces of silver you are required to buy in order to get one ounce of gold at current spot prices.

Grades

Referring to the quality of a physical commodity.

High Frequency Trading

Algorithmic trading with use of a computer based system, where multiple transactions can be completed in a fraction of a second.

Hedging

Taking a position in a futures market which is opposite of that in a cash market. This serves to minimise risk from a negative price change; the buying or selling of futures as a substitute for a cash action which will occur at a later time.

High

The highest given price of a position on a given trading day.

Hybrid Instruments

Financial mechanisms which are defined as possessing combinations of forward contracts, futures contracts, options contract contracts and other interests. These instruments can be seen as spreading potential risk due to their composite nature.

Initial Margin

A customer’s funds put forward as a means of contract fulfillment when a futures position is established.

Interest Rate

A rate which is charged or paid for the use of money usually expressed as an annual percentage of the initial amount (principal).

Intrinsic Value

The value of an option or position if sold immediately; the value of which a certain contract is either above or below the current price of a futures contract or on the commodities market.

Last Trading Day

The very last day a trader has to exercise a position on a futures or option contract.

Leverage

The act of controlling a relatively large amount of a certain commodity with a relatively small amount of capital.

Liquidity

The position whereas a certain commodity has enough exposure combined with sufficient buyers and sellers to allow for numerous transactions without excessive volatility in price.

Long

A trader who has purchased futures contract, options, or owns a cash commodity.

Low

The lowest market price on any given trading day for a certain futures or options contract.

Margin

The amount of capital put forth by both buyers and sellers to guarantee the performance of the terms of a contract.

Margin Call

A call from a broker to a client requesting the deposit of cash to satisfy certain regulatory requirements.

Naked Option

The sale of a certain option without actually holding an underlying position in that commodity.

Net Position

The spread (difference) between open long and open short contracts which a trader holds in a particular commodity.

Offer

The willingness to sell at a particular price, also called an ask. The opposite of this is the willingness to buy, also called a bid.

Online Forex Trading

An internet-based system allowing for the exchange of one currency for another. This is accomplished due to the lack of centralisation in the Forex market.

Opening Price

The specific opening price or range of prices upon the beginning of a given trading session.

Option Contract

A contract which give the buyer the right but not the necessity to buy or sell a specified amount of a certain commodity at a certain date and time.

Pegged Price

The price of a commodity which has been “pegged”, or solidified by an agreement between two or more parties.

Position

A stance in the market. This can be either short or long-term. In the commodities market, a position is the possession of one or more open contracts.

Put Option

Another type on option; in the case giving the buyer the choice to sell, if he chooses, a futures contract at a given price on or prior to a specific date.

Quotation

The bid and ask prices of a cash commodities, futures or options contracts at any given time. Quotation can also refer to an actual price as opposed to bid/ask.

Rally

The upward movement of a price (quotation). Rallies are generally used in reference to shorter-term movements.

Range

The difference between the high and low of a product within a certain time frame. A higher range can signal greater volatility.

Resistance

A price where selling will occur to recorrect previous price rises.

Reversal

A change in direction of price.

Spot

A cash market for a physical commodity (gold or silver for instance) whereas the delivery for such commodity is immediate.

Speculation

Achieving profits by trading through anticipating price movements.

Stop Order

An order which becomes a market order after reaching a predetermined certain price.

Tick

The smallest movement in one direction or another of a contract.

Volatility

The change in price over a given period of time.

Volume

The total number of buy and sell orders for futures contracts on any given trading day.

Yield

The income return of an investment, often measured yearly.

Confused about other words used in commodity trading? Don’t hesitate to contact us so we can extend this commodity lexicon (wordlist) today!