How to Trade Commodities ?
By Peter Brown
- How to Trade Commodities
Commodity trading is one of the age-old practices of making money and you can build a fortune with modern day commodity trading. The commodities refer to all sorts of raw ingredients and components that are used every day. The most popular commodities traded are wheat, corn, copper, silver, gold, gas, oil, sugar, cattle, cotton, and coffee. These commodities are produced all over the world, while the production is dominated by countries such as China, Brazil, India and the USA. Investors can invest in commodities to build wealth. You have to buy and sell futures contracts on futures exchange to trade commodities.
- Market participants
Commodity trading is not for a weak hearted individual. There are numerous technical teams that you must be aware of before starting trading commodities. Asset holders participate in the commodity market to increase the asset value. The company or an individual person holding the asset will take opposite position to minimize financial loss when the price changes. This is known as hedging. Speculators are investors with a varied investment portfolio looking to profit from the rise or fall of the commodity prices. You don’t have to worry about taking delivery of the commodities if you remember to close the trade before the expiry of the contract. You will get the first notice a few weeks before the contract expiry. Your commodity trading broker will keep you informed about it. Unlike other types of trades, commodity trading is not simple. You have a great potential to lose a lot of money and unless you have a solid risk capital, you should not think about commodity trading.
- Understand the price fluctuations
You can trade soft or hard commodities depending on your liking. Soft commodities refer to agricultural products whereas hard commodities are mined products. Usually, the commodities are priced in US dollar. The pricing of commodities varies greatly because the natural products are extremely dependent on nature. The supply and demand play a major role in commodity pricing. The weather also plays an important role because manufacturing and mining natural products in extreme weather conditions are difficult. The economic and political events happening around the globe are also responsible for the price fluctuations. The changes in the US dollar pricing also affects the cost of commodities. The unpredictable factors that are beyond the control of investors make commodity pricing extremely volatile and inherently risky.
The huge leverage in commodity trading is a lure that many investors fail to recognize. Typically, you only have to invest 3% to 15% of the futures contract to take advantage of the futures margin. However, you should always trade below the allowable margin to ensure that your investment doesn’t get wiped out due to your over-confidence.
- Commodity trading options
In order to trade commodities, you have to buy and sell futures contracts. They must be traded on a futures exchange. Individuals can’t trade futures contracts on their own. You need to be associated with a futures contract broker to trade commodities. Investors speculate price changes and try to make a profit with the price fluctuations. You should buy futures low and sell the futures high to make some profit. Futures are flexible because you can buy and sell the contract at any time you want. You are not bound by the duration of the contract in any way. Investors can pool money together to reduce risks and maximize benefits. Large and small speculators play a major role in determining the commodity market trends. In the commodity market, futures are traded in contract sizes instead of shares like the stock market.
- Start with a commodity trading plan
Commodity trading is hugely leveraged and without a plan, it is easy to lose your way. You must first determine the commodities you want to trade. If you want to actively participate in the commodity trading market, it is best to limit yourself to a maximum of three commodities. You have to do a lot of research to determine the right time to buy and sell commodities. If you manage your investment portfolio with the help of a money manager, you can diversify your interest in various commodities.
The account size purely depends on the risk capital you have. This is the amount of money you can afford to lose without affecting your lifestyle. Generally, commodity trading is reserved for high-end investors who don’t mind investing at least $50,000 in their commodity trading account. However, if you have sufficient knowledge and patience, you can do just fine with just $10,000. You can be either a long term or short term trader. Before you begin trading, you should clearly understand what you are capable of. Riding the tide will never yield success in the commodity trading market. Luck may favor you once in a while, but without a proper trading strategy, you will lose your investment in the blink of an eye. With proper record tracking, you can find a trading pattern that fits you the most.
- Online commodity trading
To start trading commodities, you first have to select a commodity broker. Online trading makes it easy for you to track your trading account at any time you want. The trading platform provided by the brokers come with quotes, charts, strategy analysis tools and order entry. You have to spend some time to learn how to place orders effectively. You have to pay attention to the commission rates and service offered before choosing a broker.
You have to sign the risk disclosure document to ensure that you understand the risks involved in commodity trading. You have to disclose your financial information because the broker unusually requires forms showing your credit worthiness, net worth, and annual income. The forms will be analyzed by the commodity broker before you are allowed to create an account. After receiving your approval, you have to fund the account. You need to use the simulation tools first to understand commodity trading before you trade with real money. If you don’t have the time to trade on your own, hire a money manager to trade commodities on your behalf.