Welcome to the commodity trading section of the website. Here you will find a selection of articles about trading commodities from the very basics to more complicated strategies. Below is a summary of trading commodities, however for a deeper look into this important financial market explore some of the articles inside this category.
What are Commodities?
Commodities are any raw material or agricultural product which can be traded or used as input for the production of goods and services. These include oil, gold, soya and natural gas. Traditionally, trading commodities is an extremely risky venture as commodity traders are often faced with having to deal with the issue of high volatility in the market which brings high risk. In addition, it is also a capital intensive activity. For example, with a margin facility of 10%, it will still require a few thousand dollars just to trade one lot of crude oil. Frankly, there are not many individuals with this kind of spare cash lying around hence shutting the door to commodity trading to most people.
For many then the most affordable way to trade commodities is through either a Forex or binary options platform. This means you never actually take ownership of the commodity eg. Gold, which would require massive warehousing costs and frankly who has the space to store blocks of gold or barrels of wheat?
Trading Commodities through Forex or Binary Options
Nowadays, anyone can have access to trading commodities through either Forex or binary options. This is because with binary options for example, you just need to pay a small premium for the option contract. That’s because binary options are essentially a derivative and as such you are no longer burdened with paying for the full contract sum for the commodity that you are trading in. This also means that you do not have to use margin to trade nor have to deal with unexpected margin calls. With Forex you’ll pay a spread which is the difference between the buy and sell price.
Because the returns on binary options are fixed and predetermined, the return that you get for your investment is not influenced by how prices have moved. As long as the expiry price closes above or below (depending on if it is a CALL option or PUT option) the strike price, your trade will close in the money. This is irrespective of whether the price is just a single point above or below the strike price.
With Forex trading the basic idea is to buy low and sell high and to profit from that difference. Many brokers allow you to leverage your funds, this means ot multiply value. This brings great rewards but also great risk too and should only be done if you are an advanced trader.
High Volatility Equal More Profits
Traditionally, commodity traders are most concerned about high volatility when trading the market. This is due to the fact that their trade can get stopped out prematurely due to the high volatility inherent in commodities. However with binary options, high volatility is looked upon as an opportunity to profit from the price movements. Since there is no such thing as a stop loss order (as there is with Forex) when you trade with binary options, there is no worry about your trade getting stopped out prematurely. In addition, when trading commodities with One touch options, the high volatility makes it more likely for you to close your trade in the money. As long as the market price touches the strike price, however brief, before the expiry of the option, your trade will close in the money.
Although commodities are highly suited to be traded with both Forex and binary options, the selection of commodities that are available for trading is rather limited. Most online brokers only offer a handful of commodities with precious metals and crude oil being the primary focus. On the flip side, the lack of choice can also be considered a blessing since it lets you focus your market analysis on these few assets.
As we are trading the market in the short term, the best way to go about analyzing the market is with technical analysis. In addition to the fact that commodities are inherently volatile, you can use suitable indicators such as Bollinger Bands or the RSI to help determine situations where the market is overbought or oversold.
While the main method of analysis should be by way of technical analysis, it is also important not to neglect the commodities market from a fundamental analysis perspective. This is due to the fact that the price movements of commodities are highly sensitive to economic news as the supply of commodities is rather inflexible when compared to other types of production. Any attempts in trying to increase the supply of a commodity to the market require a certain amount of time.
For example, if the demand for wheat suddenly increases, it still requires a whole planting season as farmers need to increase the cultivation area, wait for the crop to mature and then harvest it before sending it to the market to be sold. So between the increase in demand and the time it require farmers to meet the increased demand, there will be a shortage of wheat in the market. It is this kind of situation which many investors and analysts try to predict in order to capitalize on the price increase.
Factors Affecting Commodity Prices
As we have mentioned earlier, commodity prices are highly sensitive to economic news that concern the supply and demand of the commodity.
Let’s take a look at what can affect the prices of the following commodities:
Trading Commodities: Crude Oil
With crude oil, there are 3 main things which you have to be concerned about when trying to analyze this market. The first is supply. If any news signals a possible reduction in the supply of crude to the market, this will definitely result in the price of crude oil sky rocketing. The market will require some time to adjust to the increased prices before stabilizing. So news which can possibly affect crude oil prices are news of conflicts from the oil producing countries, acts of piracy affecting shipping lanes and changes in legislation which might curtail the production of crude oil.
On the demand side, the drop in demand for crude oil is normally as a reaction to increased oil prices. In the short term, the demand for crude oil is also quite inflexible. This means that the market has to bear with increased oil prices for the short term. However in the longer term, technology and adjustment to lifestyle will help to cushion the impact of higher oil prices by reducing effective demand which will ultimately lead to a glut in the crude oil market. Of course when there is excess supply, this will cause prices to fall. Any news such as the discovery of alternative cheaper energy sources or improved technology reducing the need for fossil fuels will definitely impact crude oil prices.
Finally, we have to take into consideration the oil reserves that are available to help cushion the impact of a reduction in the supply of crude oil to the market. If there are insufficient oil reserves, the impact of any news signaling a supply reduction will have a greater impact on the market. Hence, it is also important to take note of the available oil reserves which a country has stockpiled.
Trading Commodities: Precious Metals
Precious metals are another type of commodity which is frequently traded in the commodity markets. Unlike other types of commodities, precious metals have dual usage. First, it acts as an input for the production of micro electronics and secondly it acts as a store of wealth. Hence the kind of news which can affect precious metal prices are varied as it can range from the new discovery of alternative materials to use in the production of electronics to any news affecting the currency value of major currencies such as the U.S dollar. Therefore to trade precious metals effectively, you need to have a wide scope with your market analysis.