Are you looking for an introduction to commodity trading?
From energy commodities such as oil and natural gas to metals like gold and silver, or if you are just seeking general information on commodities, commodity trading offers a way to broaden your portfolio and tap into global markets, but be aware that it offers both great opportunities and great risks.
In this article, you will learn the basics of commodity trading, the various strategies that can be employed, and the steps you can take to get started trading safely.
You will gain a basic understanding of how to view and approach this dynamic marketplace.
Commodity Trading Market Updates: Gold and Oil
Following the latest update by Reuters , during the recent months, gold prices have been fluctuating.
The main cause behind the fluctuation is the inflation concern and the shift in central bank interest rates. However, keeping all these above factors in mind, we can discuss the price of gold in September 2024.
In September 2024, there was no movement in gold price due to uncertainty in global economic growth.
Most of the global traders approached gold as a hedge against inflation.
Hence, in September 2024, people tend to trade in gold rather than other products. However, there will be a fluctuation in price due to the various adjustments made by the US Federal Reserve on the interest rates.
In the past few months, the situation in the oil markets has been especially volatile due to geopolitical tensions, especially in the Middle East, supply disruptions, and output cuts from OPEC (Organisation of Petroleum Exporting Countries), which have all helped keep prices above $100 a barrel.
Recent output increases from non-OPEC countries have added some downward pressure, too. Traders need to watch these developments closely as oil remains a high-beta commodity, which means it tends to remain highly sensitive to global supply and demand dynamics.
1. What Is Commodity Trading?
Commodity trading refers to the process of buying and selling raw materials or agricultural products. Generally, these commodities fall into one of two categories:
Hard commodities: mineral, oil, and gas resources, which are mined or extracted from the ground.
– Soft Commodities: Agricultural products such as wheat, coffee, and corn.
Traders try to make money on price changes due to changes in supply and demand, geopolitical events, or economic shifts. But any of those factors can turn into losses, because commodity prices are inherently volatile.
2. How Does Commodity Trading Work?
There are two primary methods of commodity trading:
– Spot Trading: It refers to purchasing and selling commodities for current delivery. For instance, a cotton trader buying and selling bulk loads of cotton this same morning. Spot trading is common in physical markets, but less so in retail trading.
– Futures Trading: The ‘easiest’ form of commodity trading for an individual. A futures contract allows you to purchase and sell a commodity at a set price in the future on a specific date. A futures contract can be used to hedge against the risk of prices changing or, if it’s for a far enough date out, to speculate on future pricing movements.
Futures contracts carry much greater volatility than spot markets, which leads to much more rapid price swings and, thus, substantial risk.
Hence, futures trading needs to be done with close attention to risk management.
Tools such as Finbok can give traders exposure to a wide range of commodity futures. Futures trading can encompass many different markets and great opportunities, but there’s also risk to be managed appropriately.
3. Why Trade Commodities?
The advantages of commodity trading are many but they should always be weighed against the risks:
– Diversification: commodities allow traders to diversify their portfolios since their prices often move in opposition to those of more traditional assets such as stocks and bonds, but they can also introduce volatility that amplifies risk.
– Hedge Against Inflation: Gold and oil are commonly purchased as hedges against inflation. While commodities might protect against high inflation, they can also fall in price during stable periods.
– Liquidity Some commodities, such as crude oil, gold, copper, or wheat are very liquid. A liquid market means that a trader has little trouble entering or exiting a position at the price they desire. Some agricultural commodities might only be traded with favorable spreads at certain times of the year.
For example, during the COVID-19 pandemic, the price of gold rose as tradeors opted for safe assets. Although some traders benefited, others who entered the market too late faced the risk of losing money when the prices dropped. Timing and risk were important considerations in commodity trading.
4. Steps to Start Commodity Trading
Here are the essential steps to help you get started with commodity trading:
Step 1: Choose a Reliable Trading Platform
Step one, choose a dealing platform. Seek out a dealing platform that supports the type of commodities you’re looking to trade, charges competitive fees, and has an easy-to-use interface.
Finbok gives you access to a number of commodity markets, with educational tools and the advanced options of complex hedging strategies. It’s important to keep these advanced tools if only because they can help you better manage the risk of any strategy you choose to use. Ensuring that a risk-management system is in place is integral to protecting your trades.
Step 2: Learn the Basics of Commodities
But before you make your first trade, it’s important to grasp how commodities function, responding to a vast range of factors, ranging from geopolitical events to the weather and disruptions to the supply chain. For example, a natural disaster in an oil-producing region could push oil prices higher, while good weather could push prices for some agricultural commodities lower.
Step 3: Open a Trading Account
Then, you can pick your preferred platform and open a trading account. Finbok makes the process easy with simple steps for traders to fill in after they pass the identity verification.
Step 4: Choose Your First Commodity
A novice should start in the commodities market with one or two products. Gold and oil are widely traded and priced. If you gain experience, you can add other commodities like natural gas or agricultural products or their derivatives to the list of commodities that you are trading in your portfolio. But as you diversify, you also have to broaden your focus on all the market movements.
Step 5: Place Your First Trade
After choosing your product, you’re ready to make your first trade. Finbok’s platform provides both an exchange for spot trading and futures contracts. Futures trading allows traders to bet against future price fluctuations, but it’s a riskier strategy, according to Finbok’s Amani.
The main risk in futures trading comes from the fact that a product’s price could change significantly over a short period of time.
5. Popular Commodities for Beginners
Several commodities are commonly traded by beginners due to their liquidity and accessibility:
– Gold: Gold is famously stable, and often regarded as a hedge against volatility. But the price of gold can still move, especially if the economy starts to recover.
– Crude Oil: Crude oil is the second most actively traded commodity by volume, with its price determined mostly by geopolitical factors and global demand. How high the tide will go, in other words, is very hard to know at any given moment and can change at a moment’s notice.
– Coffee: Coffee is an agricultural commodity. Prices respond to weather and global demand. Trading coffee will provide diversification from metals and energy and is seasonal in nature.
Best Trading Practices and Risks Involved
To manage the risks involved in commodity trading, it’s important to follow best practices:
– Research and Read: Stay abreast of news and market trends for the areas in which you plan to trade. For example, if you’re going to trade in oil, pay attention to geopolitics and how it can impact oil prices. If you’re going to buy agricultural commodities, keep tabs on the weather and crop yields.
1.0 Start SmallFor those just starting on their trading journey, it’s not uncommon for them to start off with small trades. This way, the trader won’t be exposed to large swings in the market for starters, which can help to minimise loss incurred.
– Stop-loss Orders: You must ALWAYS use stop-loss orders to manage your risk. Commodities, in particular, are extremely volatile – and a stop-loss order closes your trade at a pre-determined level if the market goes against you to minimise your losses.
– Be diversified: reduce your risk by trading in different commodities, say, in both metals such as gold and agricultural commodities such as wheat or coffee.
7. Risks Involved in Commodity Trading
While commodity trading presents many opportunities, it also involves several risks:
– Price volatility: The price of commodities can be quite volatile due to supply and demand shocks, geopolitical events, and natural disasters. A sudden storm in an oil patch, for example, can cause an oil glut, while a sudden decrease in production can cause prices to soar.
– Leverage Risk: Many platforms such as Finbok do provide leverage – in other words, you can turbocharge your position by borrowing from the platform. This can multiply any gains you make but, of course, can have the same effect on your losses. Be careful how you use leverage.
Liquidity risk: Not all commodities are equally liquid. Agricultural commodities, for example, are likely to be less liquid in off-seasons. This may mean that you won’t be able to sell at the price you want.
This is why stop-loss orders have their place as a risk-management tool, so that traders don’t end up losing more than they should. While this is all obvious and trite, the nature of the beast here is risk itself, and it is risk that makes trading emotionally rewarding, as well as potentially devastating. Thus the central irony of trading: if you don’t risk anything, you can’t win anything, but risk everything and you can lose everything.
Why Trade with Finbok?
Finbok offers several advantages for traders looking to enter the commodity trading market:
– An easy-to-use interface: Finbok has a user-friendly web where our members can use our service as beginners or experienced traders.
– Wide Commodity Diversity: On Finbok, one can trade products ranging from precious metals to energy commodities and agricultural goods all in one place.
– Risk Management Tools: Finbok offers basic tools for traders like stop–loss orders, trailing stops, and market analysis tools to reduce or eliminate risks in their winnings.
Nevertheless, while Finbook provides outstanding tools for trader, commodity trading is a risky business and traders should always trade cautiously.
