How to Make Money in
Being goods that act as inputs or raw materials for several industries, commodities are widely traded across the world. The prices of these commodities depend on several factors including the market forces of supply and demand. Political events, natural disasters, weather, economic conditions, and policies of various governments also tend to cause price fluctuations with respect to commodities. This makes the commodities market highly volatile, offering several attractive opportunities for traders.
The prerequisite to being successful in commodities trading is to gain an understanding of the market and the various factors impacting the price of the commodity in which you wish to trade. Investment in commodities is possible through the physical purchase of the items or by investing in the futures markets through a variety of methods. They include buying options on commodity futures contracts, ETFs (Exchange Traded Funds), shares of companies that deal in commodities (commodity stocks) or trading commodities CFDs (Contracts for Difference).
In what can be a high risk asset class, those who wish to start trading commodities should have a well-planned trading strategy. This should be developed after adequate research and incorporate strong risk management techniques.
What are the Benefits
Commodities trading at one time was restricted to professional experienced traders. Over time, the introduction of instruments like CFDs and futures trading, along with technological advancements, have attracted individual investors. One reason people wish to invest in commodities is to diversify their portfolio beyond traditional stocks and bonds. Here’s a look at some benefits of trading commodities:
Diversification of Portfolio
The stock market and commodities have an inverse relationship. When commodity prices rise, stock prices tend to fall. To offset the impact of a decline in stock prices, investors can take positions in the commodities market. By adding commodities to their portfolios, traders can manage risks better. Rather than purchase an array of individual commodities, traders can invest in a commodity index which would include a range of commodities.
Inflation erodes the value of most trading instruments. However, when there is high inflation, the prices of commodities increase. This means that traders who had commodities as part of their portfolio would stand to benefit.
Commodities are considered a good hedge against geopolitical uncertainties. Geopolitical events such as political tensions, riots, wars, or even natural disasters cause a disruption in the supply chain. In many instances, this may lead to a scarcity of resources. This puts upward pressure on the price of various commodities. Traders can hedge geopolitical risks by including commodities in their trading portfolio.
of High Leverage
Now that commodities trading can be done via derivatives like CFDs, traders can choose to use high leverage offered by online brokers. Leverage allows traders to take big positions in their chosen securities by paying only a very small part of the total trade value. Leverage offers traders the opportunity to magnify their profits with a low capital investment. Just like forex, a small increase in the price of the underlying commodity can return an investor a lot of money.
are the Most Traded?
Being affected by a wide range of economic and non-economic factors means that commodity prices are highly volatile. The demand and supply of them also varies as a result of the different ways they are produced. Hard commodities (gold and silver) need to be mined, crude oil and natural gas are extracted, while soft commodities consist of agricultural products such as crops (soybeans, coffee and grains) and livestock.
In the global financial markets, commodity prices are expressed in terms of the US dollar. The most traded commodities in the world are crude oil, natural gas, gold, and silver.
Crude oil can be refined into petrol, diesel, petrochemicals, and lubricants. Used by several industries, crude oil is by far the most traded commodity. Two major types of oil are used to benchmark global prices - Brent Crude and West Texas Intermediate (WTI).
Brent Crude is a high quality sweet and light oil with low sulphur content and density. It can be easily refined into various usable products. This type of oil is drilled from oil fields in the North Sea, off the shores of the UK and Norway.
WTI Crude is even lighter than the Brent crude. This oil variant is drilled mainly in the American states of Texas, Louisiana, and North Dakota. WTI has a sulphur content of 0.24% versus 0.37% in Brent crude. WTI is considered ideal for production of gasoline, while Brent is preferred for diesel production.
This precious metal has wide industrial applications. It is used in solar panels, circuits, and photographic films, besides being used in jewellery making. Extracted from the ores of other metals like copper, silver prices are impacted by the demand for these metals. Silver prices generally mirror gold prices.
Other precious metals that are traded include platinum and palladium.
This non-renewable hydrocarbon extracted from below the earth is a major source of energy for generating electricity. Also used as fuel for vehicles and chemical feedstock in manufacturing industries, natural gas is typically high in demand, especially during times of economic growth.
One of the highly demanded commodities, gold finds its way into investor portfolios because of its status as a safe-haven investment. Its growing applications in the manufacture of electronics has added to its demand and made it one of the most traded commodities. Mined in China, Australia, Russia and the United States, gold has always been considered an asset to preserve value for the long term, especially during times of economic or political uncertainty. Due to its extremely high value, a growing number of investors are using Gold CFDs as a way to invest in it.
How to Trade
Silver is another precious metal that finds favour with commodity traders. High in demand because of its lustre and wide industrial applications, silver is also considered as a safe-haven investment option. Silver prices tend to be volatile, offering traders several trading opportunities with intra-day swings. Silver is also bought as a hedge against inflation. Silver can be bought physically in the form of bullion and coins or can be traded via futures, options and CFDs. Investors can also trade in silver by investing in exchange traded funds or buying stocks of companies engaged in silver mining.
Silver CFDs offer traders the opportunity to speculate on rising and falling prices. CFDs are widely preferred since they do not entail taking possession of the precious metal, are highly leveraged and allow traders a chance to enter both long or short positions based on their expectations of future price movements. Trend trading and range trading are the most popular strategies for trading silver. This requires traders to identify a trend by using historical charts and determine buy or sell positions. Trading in silver needs sound risk management tools like stop losses and take profit, especially if you are using high leverage.
XAG is the symbol for silver in the commodity market and XAG/USD is the price of silver and represents the number of US dollars required to buy one unit of the precious metal. A unit is one troy ounce of silver.
Why Choose CFDs
Although there are several ways of trading commodities, CFDs have been gaining immense popularity. This is because of the several advantages offered by them.
Physical purchase of commodities is a time-consuming and cumbersome process with issues regarding safe storage. In contrast, opening a CFD trading account is quite simple. All you need to do is choose a broker and provide certain details along with the supporting documents for opening a trading account.
CFDs do not involve taking physical possession of the underlying commodity. Instead, they offer traders a chance to simply speculate on the future price movements of the commodity concerned. Advanced trading systems help provide high levels of liquidity which make it easy to buy and sell commodities CFDs. This makes CFDs the ideal for short term investing.
Trading CFDs allow traders to take a long (buy) or a short (sell) position depending on their expectation of future price movements. This means one can find trading opportunities in both rising and falling markets. This is unique to CFDs whereas other financial instruments involved buying and selling at a predetermined price.
CFDs are leveraged products, allowing a trader to gain higher exposure than the funds available in their trading account. High leverage means low margin requirements and the possibility of magnifying your profits. One must remember, however, that leverage can also magnify losses. Due to this, it is recommended to use leverage with sound risk management techniques.
Day trading, swing trading and scalping are some of the most popular CFD trading strategies used for commodities.
How to Trade
Here are the steps involved in trading commodities CFDs:
1. Identify the Commodity to Trade
The first step to trading commodities CFDs is to finalise the commodity or commodities you wish to trade. Initially you may choose to trade in well known commodities such as gold, silver and oil as they offer high levels of liquidity and minimal brokerage fees.
2. Choose a Broker
The next step is to identify a broker that offers CFD trading in your chosen commodities. Ensure that you choose a reputable and regulated broker, as this ensures the safety of your funds and transactions. When opening a brokerage account to trade commodities CFDs you should consider the leverage levels offered, spreads, customer support, funding options and the product range.
3. Develop a Trading Strategy
Once you have opened your trading account, you need to develop a trading plan keeping in mind your financial goals, risk appetite, funds available and the analysis methods you are most comfortable using. You can choose fundamental or technical analysis or a combination of the two to formulate your trading strategy. Reputable brokers offer adequate resources to help you carry out fundamental analysis as well as
4 .Select a Trading Platform
Advanced trading platforms such as MetaTrader 4 (MT4) are feature-packed. MT4 has pre-installed indicators and customisable chart that aid technical analysis. It also features a live information feed with access to an array of economic and macroeconomic data for those using fundamental analysis to trade. The power of MT4 lies in its flexibility. The trading platform is suitable for traders of all skill levels and also caters for money managers and Expert Advisors (EAs).
5. Test the Strategy on a Demo Account
Before you begin trading with real money, it is a good idea to open a demo account and test your strategy with virtual money. A demo account simulates live trading and gives you a feel of trading with real money and explore all the tools available on the trading platform. More importantly, it allows new traders to learn and understand key concepts such as leverage, stop-loss and margin call.
6. Begin Live Trading
Deposit funds into your trading account, check out the market price of the commodity you wish to trade, click 'buy' if you expect the price to increase or 'sell' if you believe the market will fall and select your trade size.
7. Risk Management
Do not forget to use stop losses and limit orders. They help minimise losses during periods of high volatility. The quality of your trading plan and the chances of its success will depend on your knowledge of the underlying commodity, the market for it and the factors affecting its price movement.
Remember, that outlining a plan is not enough, it also needs to be followed. Markets can be volatile, and you need to trust your trading strategy rather than making impromptu decisions. It is a good idea to backtest your trading strategy using your demo account and tweak it according to your new learnings.
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