Trading Commodities 101
Trading might seem like a scary word to those of you who are not yet immersed in the world of high-value trading but that doesn’t need to be the case. Anybody with access to the internet and a bit of cash to invest can become a knowledgeable trader.
In this article, we’ll be exploring the world of commodity trading, giving you an in-depth guide that you can use to become an expert commodity trader. Whether you’re a currency trader specialising in foreign exchange rates or a crypto trade, we’re sure this guide will be helpful for you.
A commodity is quite literally an item that can be bought, sold, or traded. Commodities include agricultural goods such as rice, wheat, and sugar; and natural resources such as gold, oil, and coal.
Commodities are typically traded on exchanges that set standardized contract terms for each type of commodity. These contracts specify the quality of the commodities being delivered as well as other key things to note like the location and the agreed-upon timeframe.
Some examples of popular commodity exchanges are:
- The London Metal Exchange
- The Chicago Mercantile Exchange
- The New York Mercantile Exchange
- The Tokyo Commodity Exchange
Commodity prices are driven by many different factors including weather, geopolitics, and legal policy. If you like the sound of this and have a taste for risk then you should make sure that you have a crystal clear understanding of what all of this means before you start trading commodities.
For example, poor weather conditions in Brazil might lead to concerns about lower coffee production levels, which could cause coffee prices to rise as traders anticipate increased demand for remaining supplies.
Alternatively, if tensions rise in a certain part of the world then this might lead traders to believe that global economic growth will slow down and could cause them to sell off assets like oil and gold in anticipation of lower demand in the future.
Futures markets allow traders to speculate on price movements in a wide range of commodities without having to take physical ownership of them first. This makes it possible for investors to make money from price movements in these markets without ever taking possession of any actual commodities.
A futures contract obligates a trader to buy or sell a particular asset at a set price at some time in the future, though this is usually within 3 months sometimes it’s up to 2 years later. Unlike other types of derivative instruments like options or swaps, futures contracts must always be settled with either cash or by taking/delivering actual physical assets on the specified date.
The value of any outstanding futures contract fluctuates according to changes in the underlying asset’s spot price. The most popular way for individual traders to access these markets is via CFDs, which we’ll cover shortly, but it should be noted that there are many different ways that people can trade commodities depending on their preferences.
A Contract For Difference effectively allows two parties, the trader and their broker in this case, to agree on an asset’s price today with plans for one party to buy it from the other at that price at a set point in the future. The buying trader will usually pay a small amount, a fraction of the total price, and then agree to pay or receive any difference between the current price and the price agreed at the contract’s end date.
There is no one-size-fits-all approach to trading commodities as different traders will use different strategies depending on their goals, risk tolerance, and the markets they are trading. However, some common approaches include:
This involves analyzing economic indicators like GDP growth rates, inflation levels, and employment figures in order to identify long-term trends that might impact the commodities prices.
This approach uses charting tools and historical price data to identify patterns that might indicate where prices are headed in the future.
This strategy involves buying or selling assets that are showing signs of strong price momentum in the hope of riding this wave for profits.
This technique seeks to profit from assets that have been trapped in a tight trading range by placing trades at key support or resistance levels.
If you’re interested in commodity trading then the first step is to open an account with a broker that offers access to this market. Once you have done this, you will need to deposit some funds into your account so that you can start placing trades.
It is important to note that commodity prices can change a lot so you should always be careful not to invest more than you can afford to potentially lose. You should also make sure that you have a firm understanding of the markets before putting any real money at risk by opening a demo account first.
Once you feel confident enough to start trading then you will need to choose which commodities you want to trade and decide on a strategy for doing so. You should also make sure to do enough research beforehand as there are many different moving parts.