Beginner's Guide To Commodities Trading
Commodities trading is fast becoming a viable outlet for people to engage in international trading of high-end products. While some newbie traders might find it challenging to understand and interpret the forex market, commodities trading is more relatable, especially for beginners.
The beauty of online commodity trading and the stock market commodity is that you do not have to own any goods traded online because it is an indirect form of trading. All you need is your commodities broker for facilitating your trading through their online platforms to enable you to trade price action (changes or fluctuations in commodity prices).
So, this article is targeted at beginners who want to begin earning online with commodities trading; if this sounds like you, keep reading for more value!
Wondering how, to begin with, commodities trading?
What are commodities?
Commodities are tangible goods, otherwise known as raw materials, that people trade to facilitate the production of more complex goods. So, commodities drive the advancement of global economies to sustain world commerce.
Good examples of the stock market commodity include but are not limited to gold, oil, coffee, etc. Commodities stand out when traded compared to other globally traded assets because of their uniformity. For instance, you will buy an ounce of gold in the United States of America at approximately the same price in South Africa.
As a result, commodity markets are standardized and relatively more organized, with fewer nuances than other assortments in the online trading community.
Two primary classes of commodities exist for trading activities:
- Soft commodities: They are primarily agricultural products requiring the farmer’s attention. For example, coffee, sugar, wheat, etc., are subject to significant environmental changes like climate and can have varying prices due to the seasons.
- Hard commodities: They mainly include mined substances like oil, precious metals, energy substances, etc. They have more stable prices because they are not subject to environmental changes and do not depend as much on human capacity as agricultural products. However, government policies can easily influence hard commodity trading.
What is commodities trading?
Commodities trading refers to the indirect online transaction of goods without a need to own them. As a result, commodity traders trade price fluctuations or changes in commodity markets. It offers more opportunities for people since you do not have to own a farm or a mining industry to participate in online commodity trading.
Historically, commodities were traded physically, making it somewhat difficult for more people to join the market independently. However, online trading platforms and brokers have recently made commodities trading available to everyone.
So, do you want to know how to trade commodities?
Why should you trade commodities?
Learning how to trade commodities comes with a lot of perks. Here are some valid reasons to trade commodities:
- It offers many trading opportunities due to multiple price fluctuations
- Commodities trading allows you to use leverage to boost your earnings
- All-round market availability for flexible trading
- Commodities trading helps you diversify your trading portfolio for more opportunities
How to trade commodities
Now that you know why you should trade commodities, it’s time to understand how the commodity market works and how to navigate it.
Here is how:
Develop your trading strategy
Trading strategies help you analyze the market and decide when to buy or sell commodities based on price action. Developing your trading strategy requires lots of research because several methods are available. Whether you want to utilize the fundamental or technical analysis for your trading strategy, they contain other types of systems that require further research.
However, in a nutshell, fundamental analysis utilizes more relatable information like the news to make market predictions. In contrast, technical analysis uses more complex tools like live charts to make market predictions. Your commodities broker will usually help you choose the best commodities trading strategy to succeed.
Need a reliable trading strategy?
Reduce your propensity for risk
Commodities trading can be pretty risky, especially with the involvement of leverage to boost earnings. While leverage can increase your profits, it can magnify your losses.
Here is how to guard against more risks:
- Enter trading positions with small sizes
- Focus on decreasing losses rather than on increasing profits
- Diversify your commodities trading to protect yourself from inflation
- Consider trading commodity futures by choosing whether to buy or sell.
Seeking where to trade commodities?
Best commodities trading platforms for beginners
Now that you know a thing or two about commodities trading and are ready to begin online commodity trading, you will need some online brokers to help you get sorted out.
Here are some excellent options we have for you:
What do stockbrokers do?
They also provide financial guidance, trade stocks, and convince their clients to make profitable investments. As a result, the stockbroker charges a fee–commission.
Now that you know what stockbrokers are and do, here is a review of the three best stock brokers in 2022.
Best Online Stock Brokers For Beginners
With eToro, you can access commodity markets through CFDs and futures contracts using leverage. They offer opportunities to trade uncommon metals like nickel and platinum according to the forces of demand and supply.
Additionally, eToro supports social trading, allowing you to connect with other traders and share your experiences—A chance at social trading facilitated by copy trading features.
The beauty of trading commodities with eToro is that they support beginner traders and take away every pressure to be an expert.
- Supports commodities trading
- Social trading featuress
- Minimum $10 deposit
- Trades rare metals—hard commodities
- Demo account
- Live chat and customer support
- 67% CFD investor risk-on trading CFDs
- Not accessible in every country
With approximately 24 different commodities, Avatrade supports your online commodity trading through CFDs. It is an excellent commodities broker choice for beginners because they provide extensive educational and instructional trading materials to assist newbie traders with building their trading skills.
- Low spreads
- About 24 commodities to trade
- Beginner-friendly through educational and instructional materials
- Well regulated
- Multiple trading platforms like MT4, MT5, etc.
- Supports social trading
- 24/7 customer support
- Minimum selection of agricultural commodities
- 71% CFD investor risk
- $100 Minimum deposit
Want to trade price action on commodities securely?
How do commodity markets operate price difference?
Commodity markets operate by trading price differences between commodities. However, commodity prices are not independent of themselves. They are subject to a couple of factors that significantly influence the price fluctuations of things. Interestingly, the forces of demand and supply affect or influence the prices of commodities in the international market.
Here is how:
Forces of Demand
When a commodity is in higher demand, invariably, the price shoots up and vice versa. For example, a press release from the world bank reveals that the lockdown of 2020 due to the covid-19 pandemic heavily impacted the commodity markets, especially energy commodities like oil, aviation fuel, etc.
As a result, oil prices went down because of low demand since people could not move around or travel. However, demand forces, like commodity prices, are not independent of themselves.
Here are a few elements that influence the demand for a commodity:
Global economic status
A healthy and thriving global economy encourages more economic activity, increasing demand for commodities, especially in manufacturing sectors, and a consequent price increase. Similarly, weak economic activity due to a failing global economy causes a decline in things since few companies and industries need raw materials.
Emerging markets like China and India encourage more demand for commodities. The reason is that the countries that own these emerging markets require more supply of raw materials for their manufacturing and industrial activities. As a result, the increased demand increases the prices of specific commodities.
Consumer and manufacturing trends
The high consumer demand for a particular commodity creates an increased demand, resulting in a higher price. For example, if there is a higher demand for jewellery, then the cost of precious metals like diamond, gold and silver will increase. Similarly, manufacturers contribute to price alteration with their demands. For example, suppose the price of copper for industrial processes increases due to much demand. In that case, manufacturers can shift towards needing more aluminium as a worthy alternative, which can cause an increase in aluminium prices.
The exchange rate of a significant determining currency for commodities can affect the demand for the product. For instance, commodity prices go up when the United States dollar rises and vice versa. The reason is that most commodities are priced in the United States dollar, so its exchange rate influences pricing and demand for commodities.
The forces of supply
Commodity supply refers to the availability of those commodities and is also determined by certain factors.
Here are some:
Government policies and intervention
Government regulation is a crucial determinant of commodity supply and availability. A good example is the constraining of the supply of some commodities or the imposition of heavy taxation to control commodity circulation.
Trade wars and social and economic sanctions on major suppliers of a particular commodity can affect its availability and supply.
Natural disasters primarily affect the supply of soft commodities. For instance, a bad weather condition or pest attack can limit the supply of some farm products like cocoa, cotton, etc.
Leverage is one significant feature of commodities trading useful for increasing trading profitability. However, while using leverage to trade commodities offers more prospects for enormous profits, it can ruin your trading experience by magnifying your losses. It is better to trade commodities with a mindset to decrease losses than the desire to increase profits. In this way, you can easily guard against the usual trading greed that maims countless commodities trading accounts.