Trading Tips

How to Become a Commodity Futures Trader – Short Guide

Commodities markets have traditionally been highly exclusive, available only to a select few individuals with large bank accounts who’ve taken the time to master their skills and perfect their strategies. While you’ll still need skills and expertise to succeed, it’s now easier than ever to enter the commodities market and start trading commodity futures.

Becoming a commodity futures trader can help you diversify your portfolio, minimize risks, and maximize profits. Although it carries some risks, the potential rewards make it well worth it. However, it would help to keep in mind that the path to becoming a trader is a long-winded one.

So, how do you become a commodity futures trader? What do you need to do to make a name for yourself in the commodity market? Let’s find out.

Who is a commodity futures trader?

A commodity futures trader is an individual or corporation who uses an exchange or broker to buy and sell futures contracts on the futures market.

As a trader, you’ll have access to four main types of commodities:

  • Energy
    Crude oil, natural gas, alternative energy sources like wind and solar
    power, etc.
  • Metal
    Gold, silver, platinum, copper, iron, etc.
  • Agricultural commodities
    Corn, wheat, coffee, cocoa, cotton, sugar, etc.
  • Livestock and meat
    Cattle, hogs, etc.

Commodity futures traders enter into a legal agreement to buy/sell a commodity at a predetermined price on a set future date. The buyer of the futures contract accepts the obligation to buy and receive the underlying commodity, while the seller accepts the obligation to deliver the underlying commodity upon expiration of the futures contract.

There are basically two types of traders that may engage in commodities futures trading: institutional and speculative traders. Speculative traders may never take actual delivery of the underlying commodity itself since they only profit from the changing price of the futures contract. For example, a speculative oil futures trader wouldn’t have to transport goods like crude oil when the futures contracts expire. Instead, he will buy the futures contract, wait for its due date, then sell it at (hopefully) a higher price than the original, and turn a profit in the process. Of course, there’s always the risk of losing money if the futures price of the underlying commodity drops at the time the contract is being sold.

Skills and experience needed to become a commodity futures trader

The commodity market is a volatile one. The constant price fluctuations could make it difficult to predict the overall market trend accurately. An unexpected drought can make the price of agricultural commodities soar, while an unstable political climate in the Middle East can cause oil prices to drop. So, to make it as a commodity futures trader, you’ll need a deep understanding of the market and the major factors that affect it.

Additionally, having the following requisite skills and expertise can be a plus in your journey to becoming a commodities futures trader:

  • Understanding Risk Management
    The buying and selling of commodity futures should never be done based on instinct or gut feeling. You need to understand how to correctly calculate your risk exposure to reduce risks and maximize the potential reward.
  • Critical thinking skills
    The commodity market is a fast-paced one. You’ll need highly developed critical thinking skills to make split-second decisions that will yield the best trading results for you.
  • In-depth knowledge of financial markets
    A thorough understanding of domestic and international financial markets is an added advantage for any futures trader. You need to be familiar with the trading systems, exchange markets, the buying/selling process, and more.

How to become a commodity futures trader

You cannot become a commodity futures trader overnight. It can take years to master all the required skills and obtain all the necessary licenses. Furthermore, even though the market isn’t entirely as exclusive as it used to be, it’s still not possible for just about anyone to enter it. You’ll need a reliable broker who will give you access to commodity trading markets and exchanges.

So, without further ado, take a look at how to become a commodity futures trader.

Invest in your education!

Getting a relevant college degree isn’t exactly a requirement, but it can help you find a position as a commodity futures trader more easily. Many investment firms look for candidates who have an MBA or a relevant undergraduate degree in a field such as finance.

If getting a college degree is not an option, you still have access to many online investment courses that could help you advance your career as a trader. They’ll introduce you to the trading basics, help explain the key concepts, formulas, and strategies, and even guide you to find the best broker for your needs.

If you’re a complete newcomer to the world of commodity futures trading, you’ll need to finish at least one course to get acquainted with the key concepts and processes.

Get in touch with a commodities trading company!

Once you have the necessary education, you can start searching for a position at an investment firm or a futures commission merchant (FCM). Keep in mind that most FCMs are located in the trading hubs like Chicago or New York, so it might be in your best interest to move there if possible to increase your chances of employment.

Since you cannot get a trading license if you aren’t already employed in the field, finding a position at an investment firm or FCM is essential. You’ll get on-the-job training where you’ll learn all the specificities of commodity futures trading, master different trading strategies, and get better acquainted with the market.

Finish the Series 3 exam!

Series 3 is a National Futures Association (NFA) qualification exam administered by the Financial Industry Regulatory Authority (FINRA). Passing the exam is a critical step toward becoming a registered commodity futures trader.

The exam consists of two parts, one on the general futures market and the other on rules and regulations, and lasts 150 minutes. You’ll have to answer 120 multiple choice questions and get at least 70% right to pass (even though there’s no official pass rate). If you pass, you can register with the NFA and start trading futures contracts.

Should you fail, you can retake the exam, although you might get a waiting period.

Register with the NFA!

With employment in the commodity trading field and a completed Series 3 exam, you can register with the National Futures Association (NFA). If you’re not registered, you cannot obtain your trading licenses. And if you don’t have a trading license, you cannot buy or sell investment products and services.

You’ll need to have passed the Series 3 exam within two years before applying to the NFA.

How to become a commodity futures trader – an alternative for independent traders

If you want to be an independent trader, you have the option to find a reliable broker and get funding to receive access to the commodity markets and exchanges.

At One Up Trader, we can connect you to our multiple networks of funding partners and brokers to get you started with the world of investing. You’ll have to go through a 1-step evaluation, but once you’re done, you will be guaranteed funding with one of our funding partners, and you can start trading commodities futures immediately.

Final thoughts

Becoming a commodity futures trader can be a challenging process. It requires adequate knowledge of the commodities markets and a thorough understanding of the trading processes. However, it’s well worth it. With some effort and dedication, even a complete novice to the world of trading can become a professional futures trader in no time.