Commodities are natural goods that may or may not come under human life’s daily use, for example, gold, wheat, soybean, beef, etc. They can be exchanged with other products or against currencies. These financial instruments allow traders to introduce diversity in their portfolios.
Previously commodity trading required much energy and time as the goods had to be brought to the local market for exchange. Now it is possible to deal with commodity trading from the comfort of your home.
What are the types of commodities?
We can classify commodities trading into the following four categories.
● Energies. It includes oil, gas, crude oil, heating oil, etc. These commodities are subject to shifts in prices depending on the economic situation globally, developments in renewable energy sources, and new provisions imposed by the Organization of Petroleum Exporting Countries.
● Metal. Metal commodities include gold, platinum, copper, etc. Gold or XAUUSD is one of the common investment products for many as it is considered a stable material.
● Livestock. As the name indicates, livestock and meat refer to the eatable products from the poultry farm and animals.
● Agriculture. This includes soybeans, corn, wheat, rice, cocoa, etc. Investors who choose agriculture as their go through have to take the demand and supply into account for trading.
Characteristics of Commodity Trading
Trades have to understand some common factors affecting them while tradingcommodities. Let us go through a few as follows.
Demand and supply
The increasing need for a particular commodity can cause a huge shift in the price. For example, if drought causes damage to the corn crop, the supply will be affected heavily. While the demand remains the same, the reduced supply can cause an increasing shift in the cost of corn.
Volatility and liquidity
Good price movements and increasing volume mean better trading conditions for traders. The slippage on trades is minimal, and the volatility is never-ending.
Market hours
Traders can trade on commodities 24/5. The trading hours can depend on the exchange.
Commodities Trading Strategies
There are various techniques used to trade commodities. One of the advanced includes analyzing the level 2 market data to identify big buyers and sellers and then take the same side of the trade.
Beginners and amateurs can learn to trade using technical analysis and then, later on, analyze the fundamentals. To explain briefly, the prior involves using support/resistance, supply/demand, and trend lines for measuring market movement while the latter utilizes the economic news.
Image 1. A technical trader uses a simple key level highlighted in red to trade the Soybean Cash CFDs. Their final exit point is the previous high, with a stop loss just beneath support.
Advantages and Disadvantages of Trading Commodities
Let us go through a few advantages of trading commodities:
● Diversify. Traders can invest in commodities to scatter out their investment into multiple instruments. Diversification helps spread out your risk. Traders can also invest in gold to hedge against inflation.
● Direction. Traders can trade on CFDs on both long and short sides and use hedging strategies.
● Leverage. Traders can enjoy a good amount of margin. While this can help increase profits, it can also increase the risk.
A few demerits of commodities are:
● Uncontrollable situations. Any major geographical change can shoot up or fall down the price of commodities. This is one of the reasons why they may be considered high-risk assets.
Traders must adhere to proper risk management while trading. With a good strategy and mindset, it is possible to trade commodities for a living.
