Understanding Commodities Trading

Liquidity is an important concept in trading. It describes the ability to execute orders of any size quickly and efficiently without causing a significant change in price. In simple terms, liquidity refers to the ease with which you can buy and sell shares (or contracts). Liquidity can be measured in terms of:

• Width – How tight is the bid/ask spread?
• Depth – How deep is the market (how many orders are resting beyond the best bid and best offer)?
• Immediacy – How quickly can a large market order be executed?
• Resiliency – How long does it take the market to bounce back after a large order is filled?

Markets with good liquidity typically trade with tight bid/ask spreads and with enough market depth to quickly fill orders. Liquidity is important because it helps ensure that your orders will be:

• filled
• filled with minimal slippage
• filled without substantially affecting price

It’s important to note that some of these commodities – such as oats – are very thinly traded, which means that prices can rapidly move up or down. It can also make it difficult to exit a position (especially a large one) at a good price. As such, it is recommended that you research any commodity market before placing trades to ensure there is adequate liquidity.