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Commodities are natural goods and resources which are harvested, mined and extracted. They are then bought and sold by traders on the commodity market. Commodities are broken up into hard commodities, those that need to be mined or extracted, and soft commodities, which are grown and harvested. For example, gold and natural gas are hard commodities, while corn and soybeans are soft commodities.
The commodity market is made up of buyers and sellers, causing the prices of these various commodities to move constantly. Given that these are physical commodities that can be harvested or extracted, sudden influx or sudden lack of supply into the market can impact prices considerably. Commodity traders need to be highly aware of the market’s direction (market trend) to help predict price changes.
Commodities are bought and sold for immediate delivery all over the world on a daily basis, from restaurants purchasing ingredients to people buying jewellery and drivers filling their cars with fuel. Commodity trading also takes place through futures contracts: the agreement of a future price for the sale of a commodity at a future date. Additionally, commodity-related firms trade on the equity market: companies that deal with any part of the supply chain of a specific commodity, from gathering resources to transforming them and finally distributing them to consumers. Commodity ETFs (Exchange-Traded Funds) are also available on the equity market for both retail investors and larger institutional investors: investment funds that trade like a stock. They are largely used to track the prices of an individual commodity or multiple commodities to form a basket.
Becoming a commodity trader is considered a long-term project. A prospective trader requires extensive knowledge of individual commodities and the wider market conditions, with specialised training and education essential to be successful.
Most commodity traders tend to focus on one single commodity and therefore have deep knowledge of that specific commodity, including the commodity’s production process. Consisting of physical goods, a commodity’s supply chain can sometimes involve complex transactions. For agricultural products, how and where they grow, how the weather affects this process, and how they are harvested, stored and transported are all points that affect the final price point of the product. Being able to foresee price movements based on complications in any of these stages is vital for a successful commodity trader.
For other products such as energy sources, how they are extracted and stored is also crucial towards predicting price movements. Another big factor that impacts the price of these commodities is global conflicts. They are found in specific areas of the world and controlled by specific countries. Therefore, conflicts involving any of these countries can complicate the exporting and availability (the supply), in particular crude oil and natural gas. Being aware of these conflicts helps investors to predict price movements. The number of different scenarios which impact the commodities market highlights the need for extensive research for a successful commodity trader.
A basic necessity of any investor or commodity trader is the ability to research, utilising various trading formulas and resources. Understanding microeconomic changes in the market in terms of short-term price changes and market behaviour is vital for successful trading in the commodity market. Price movements occur constantly, thus creating opportunities for traders to generate short-term investments.
A macroeconomic understanding is also essential to predict price movements in long-term trading. Knowledge of the worldwide news cycle and political landscape is required to track sentiment. Geo-political conflicts have a significant impact on the price of certain commodities, therefore being able to predict and react to political developments is essential. Discovering where the industry-leading investors are placing their faith is necessary to analyse future trends in the market.
Quick thinking and acting decisively are imperative skills for short-term trading success in the commodities market. When a trend has been identified (profit potential), the trader has to act quickly to fulfil that potential. Emotional balance is also vital for any trader, in any financial market.
The commodity market is volatile, therefore certain investments can suffer unexpected losses. Continuing proper due diligence and not deviating from the original trading strategy is vital while implementing risk management to protect yourself from potential losses.
A significant part of the job involves speaking with various financial professionals and clients. Therefore, efficiently communicating complex trading strategies is vital for a successful commodity trader. Maintaining good personal and professional relationships with coworkers and industry insiders is crucial for future career prospects, generating opportunities to climb up the company ladder or opening doors elsewhere.
The most common commodity trading job is being part of a larger trading firm or commodity broker. Knowledge and experience in trading commodities and the financial markets are recommended prior to applying, however, certain trading firms have opportunities for rookie traders, giving them training and mentorship on the trading floor. The competition for these jobs is fierce and therefore only the best candidates make it through. Statistics and data analysis skills are particularly important for prospective traders, as the market becomes increasingly data reliant. Most firms look for a bachelor’s degree in business administration, finance and economics before hiring prospective candidates. However, given the progressively growing importance of data to the commodity market, applicants with degrees in maths, engineering and data science are also highly coveted. Possessing the ability to speak multiple languages also helps set you apart from the rest of the field.
Another way to become a trader is to get a low-level job at a trading firm. From there you can work your way up the ladder until finally becoming a trader. This strategy has fewer entry requirements and therefore means that beginning the journey is easier, however working your way up the chain can be complicated. Creating personal relationships within the company while learning the trade can allow you to make your way up the ladder and onto the trading floor.
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