Commodity Trading
2018 saw the Millennial generation overtake Baby Boomers as America’s largest generation. Naturally, this trend has certain economic, business, and financial implications. As the largest and most studied generation in history, Millennials have been the focus of research especially when it comes to money.
Following the recession of 2008, younger generations (Millennials, Generations X and Z) are facing an increasing amount of financial and economic burdens. Massive student loan debt, historically low wages and lack of security for retirement are just a few of the pressing issues young people today have to face. But while dealing with the increased financial uncertainty in their lives, younger generations are finding new ways to take control of their finances. As true digital nomads, they looked for and found the answer online. Namely, in commodity trading and investing.
Commodity options trading exploded in the past decade. The average daily volume for options trading rose from 11.4 million in 2007 to 16.5 million in 2017, according to data from The Options Clearing Corp. That is a staggering 45% increase.
Interest in commodity trading is increasing for a reason as it represents an exciting and sophisticated type of investment. But what is commodity trading exactly?
This type of trading is somewhat similar to stock trading. However, the main difference is the asset that is traded. Commodity trading is about the purchase and trading of physical commodities such as gold, silver, platinum rather than company shares and bonds.
Trading commodities online is a relatively simple process. It requires access to an exchange and a basic understanding of what commodities are and how they react to economic, political and market changes and trends. Once you have a good grasp of the basics, you should pick a reliable commodity broker. It is always best to opt for one that offers online trading.
Renowned online broker Alpari is one such platform. Alpari offers a host of high-quality personal finance information online and free tools to support your financial goals. The versatile trading platform is routinely ranked amongst the top when it comes to functionality, ease-of-use, and metrics such as charts, quotes, strategy analysis, as well as order entry. The combination of an excellent product, good service, and low commission rates make Alpari one of the preferred online brokers for commodity trading.
Meaning of Commodities
A commodity is a product that comes from the Earth – it has either been grown or produced naturally in the environment. It is usually an unprocessed good that can be processed and resold to potentially make profit.
Types of commodities
The most common examples of commodities include precious metals (gold, silver, platinum), cotton, wheat, cattle, lumber, oil, natural gas, coffee, sugar. There are many commodities to choose from with some assets being more popular than others.
Generally, crude oil, gold, and silver are the most traded commodities. They are included in international and national marketplaces along with a variety of other commodities and in pairs with fiat currencies (USD, EUR). Prices of commodities are driven by a variety of factors. In addition to demand and supply – international trade deals, local policies, economic incentives, new deposit discoveries, and developments all affect market movements.
Until recently, the commodities market was mostly reserved for large companies and institutional investors. However, individual investors have also gained a point of entry via licensed commodity brokers that operate on commodity exchanges, such as the New York Mercantile Exchange, the Chicago Mercantile Exchange (CME Group), the Tokyo Commodity Exchange, the London Metal Exchange, the European Energy Exchange, the Moscow Energy Exchange, and others.
Both companies and individual investors can trade commodities. While individual investors do not need commodities as companies do, they can potentially make a profit from the changes in commodity prices. To make a profit from the commodities market, investors must purchase or trade the commodity at the correct time depending on the movements of the price. There are several methods that investors can use to trade commodities:
- 1Trade commodities in futures, which represent contracts for the purchase or trade of a commodity at a certain price.
- 2Trade commodities with options, which represent the purchase or trade of a commodity at a particular date and price.
Both methods of commodity trading require a well-researched trading plan and practice beforehand. It’s best to look for a commodity broker like Alpari that offer simulations to practice with before you invest actual money. Training and simulations will familiarize you with the interface of the broker, as well as the mechanism of placing orders. A lot of novice traders end up losing money due to critical order entry errors, so it’s best to take your time and develop a coherent and efficient plan for approaching markets.
To be successful at commodity trading, you require discipline and careful consideration of prospective trades so as to avoid overtrading. The focus should be on quality not quantity as a few well thought-through trades are worth more than many average ones.
Commodity Prices
Commodity trading starts with having a basic understanding of the market and the main forces that drive commodity prices up and down. Depending on whether you are trading commodity futures or options, you need to keep in mind that these are derivatives of the actual market for the physical delivery of the commodity you decide to trade.
Therefore, it is important to learn the fundamentals of the supply and demand for the asset in question. All worldwide commodity exchanges, as well as a variety of trade organizations and government agencies, offer commodity data, news, and updates free of charge. However, to stay on top of sudden market movements, traders are advised to add Google alerts and professional subscription services.
Understanding the commodity markets and what determines the future direction of commodity prices rests on a combination of both technical and fundamental analysis. Technical analysis is the study of patterns and price momentum on charts.
Fundamental analysis, on the other hand, involves compiling and interpreting supply and demand data. When it comes to commodity prices, these two sources provide the best insights into the fundamentals of market movement and commodity trading.
Commodity Trading Online
All commodity trading online takes place through registered brokers who support the products you are interested in. After selecting an online commodity broker, traders need to open an account and pass through a KYC (Know Your Customer) process before receiving approval for trading.
As a standard practice to avoid the funding of terrorism and any money laundering activities, online commodity brokers require disclosure of financial information and agreement to the risks involved in trading commodities. Traders need to have a good understanding of the data disclosed because commodities are highly leveraged assets. There is always a chance that one can lose more money than initially invested. Therefore, a broker requires information on income, net worth, and creditworthiness on all applicants.
As a standard practice to avoid the funding of terrorism and any money laundering activities, online commodity brokers require disclosure of financial information and agreement to the risks involved in trading commodities. Traders need to have a good understanding of the data disclosed because commodities are highly leveraged assets. There is always a chance that one can lose more money than initially invested. Therefore, a broker requires information on income, net worth, and creditworthiness on all applicants.
Once a trader has passed the KYC verification and approval process, the next step is to fund the account. It is up to the individual to determine what amount of funding or account size they are comfortable with based on their comfort level and risk tolerance.
Before starting to trade commodities with real money, it is important to develop a well-researched trading plan. Many commodity brokers offer demo accounts to practice with before moving on to actual money. Training with a demo account is the best way to familiarize oneself with the broker’s platform, as well as learn how to develop a coherent and efficient plan for approaching markets.
Before trading commodities online, traders should consider what trades to make and avoid overtrading. With commodity trading, a few potential profitable trades are better than many trades. One of the greatest downfalls of many commodity traders is not being selective and doing too many trades.
Brokers require applicants to provide their personal and financial information, and acknowledge the risks
Applicants will then be identified as suitable or unsuitable for opening a commodities account
The applicant’s account can then be verified and approved, so they are able to add funds
Before trading with real money, applicants are advised to develop a well-researched trading plan
Opening a demo account is the best way to practise using the trading platform before using a live account
Spot Commodities
Understanding commodities will require particular attention to the underlying supply and demand fundamentals for that asset class. When it comes to commodities, there are various important factors to consider. First comes the difference between trading spot commodities and trading commodity futures and options.
The trade of spot commodity is related to the expectation of actual delivery, whereas trading commodity futures and options are related to derivatives of the actual market for the physical delivery of the commodity in question.
Spot commodities are commodities traded on the current market. They involve straightforward transactions where there is a buyer and a seller and the seller makes delivery of the commodity immediately after the transaction is settled. A spot commodity is different from a futures transaction, where the buyer and seller agree to exchange the commodity at some point in the future.
This means that spot commodities must be ready for immediate sale and delivery, as most transactions typically settle within days after the trade has been made. Because of this, the price of a spot commodity has more exposure to supply and demand pressures within the market than futures contracts. Future contracts specify a price for delivery of a certain quantity of a specific commodity at a date in the future.
Trading spot commodities also reflects the perishability of the said commodity as this element impacts the volatility of its spot price. Periods of excess supply usually result in the cost of spoilage outweighing the cost of holding the commodity.
Spot Commodities: Supply and Demand
Therefore, it is important to learn about the underlying supply and demand fundamentals for spot commodities. Commodity exchanges, trade organizations, and government agencies typically supply commodity data free of charge.
Energy Markets
In the energy markets, the API and EIA are the best sources of information.
Soft Commodities
In grains, soft commodities, and animal protein markets, the U.S. Department of Agriculture issues weekly and monthly reports that include in-depth data and analysis.
Trading spot commodities requires attention to and understanding of the supply and demand or fundamental analysis. At the same time, the spot commodity market is highly volatile and laden with risk. While there is a great opportunity to make huge gains, there are also commensurate risks.
There are no restrictions on the types of traders that can be active in the commodities market. Typically, traders are dealing in raw materials used at the beginning of the production chain are the ones interested in spot commodities. Examples include copper for construction or grains for animal feed. These traders can operate independently or work for companies, manufacturers, or other large commodity producers.
Spot commodity trading happens fast because traders usually are trying to secure the best prices on purchases while simultaneously supplying competitive bids to customers. However, independent commodity traders that work as broker-dealers are also active in the market. Additionally, professional traders who work for brokerage firms contribute to creating a vast and liquid international commodities market.
Commodity Trading Skills
Trading spot commodities can sometimes be regarded as an act of speculation and attempt to make profits on small movements in commodity prices. In this case, the trader does not really need the specific asset they are trading but seeks to gain exposure through forwarding and futures contracts. The possible strategies here are to go long if they believe prices are moving higher or short the commodity when they expect prices to fall.
Understanding the risks
Whether trading spot commodities, futures or derivatives – traders need to exercise caution in the commodity markets. Commodities are volatile instruments and traders often need to react quickly to market-moving events. The potential gains from trading on the spot commodity market are high but the potential for losses is just as great.
Dedicating time to learn
With the onset of online trading, the speed and efficiency of execution as increased. However, this does not negate the need for commodity traders to exercise control and precision when trading spot commodities. Mastering online trading requires a level of expertise that comes from hard work and study. Visiting and familiarizing oneself with the resources of an online broker should be part of the process of commodity trading.
Choosing a secure environment
Commodity trading can be a successful venture in the long haul if the chosen broker provides a trading environment that is trustworthy, reliable and technologically advanced. Opting for a reputable, reliable and regulated online broker increases your chances at success when trading commodities, Forex, metals and commodity futures CFDs.