Start Your Commodity Trading Journey TodayCommodity trading is the market activity which effectively links producers of commodities with their commercial consumers. Just think about when you wake up in the morning and smell the coffee and taste the fresh orange juice. And what about the copper pipes that carry the hot water for your shower and the quality cotton shirt you wear for work.
Get your FREE INO Trading Blog Alerts when you subscribe to our free Commodity Universe Newsletter here. Just complete the simple form below. It's as easy as 1-2-3!
Then you jump into your car made from steel and aluminium, with nickel and lead for the battery, and fuelled by gasoline refined from crude oil. Without these and the process of commodity trading, it seems as if the world as we know it would grind to a halt. So what marks commodity trading out as an exciting and important area of investment? There is a third actor in these markets: the trader or speculator.
Basically, markets work on supply and demand, and the commodity trader needs a sharp eye to watch these dynamics and spot when that demand-supply gap widens. Let’s say there is growing demand for coffee imports in the US and Europe and a crop failure in Brazil, and other things being equal, we would expect to see future prices rising. You can buy a commodity for cash now and for delivery today, and that is referred to as the spot price. But what will the price be in the future, not today.
And if you are a producer, who will buy your product, while if you are a manufacturer, can you be sure you can secure the right amount of raw material at the right time and price? This is where the commodities markets, which stretch across all time zones, from Shanghai to London to New York, play a central role. Commodity futures are a great invention because they turn the real thing (oil, cotton, natural gas) into a paper contract, allowing for managing the risk of big price fluctuations. Commodity trading is in fact futures trading, where the futures contract represents an agreement to buy or sell a fixed amount of a commodity at a specified location in the future at a pre-determined price.
Like stocks and shares, commodities go through bull and bear markets and history seems to suggest there is an inverse correlation between equities and commodity markets. The prevailing view is that the world is now in the first few years of a new bull phase for commodities markets, which started about 2001, driven by huge demand from emerging economies, not least China, for raw materials to fuel economic growth.
To have a measure of where various commodity prices are heading, a number of indices have been compiled, each with different weightings reflecting the importance attached to the particular constituents. For example, the Reuters-CRB Futures Price Index consists of the 17 most heavily traded commodities worldwide, each given equal weighting. Proper rules of governance provide stability and regulations which aim to give a high degree of integrity and so a measure of confidence and protection to all, whether you are based in the US, UK or elsewhere in the world. When trading commodities the most common way is buying on a margin, much the same way as stocks and shares are traded. With commodities though the margin is relatively thin, say as little as 1-5 per cent, and this is what generates the risk but also potential reward for the trader. There are other ways to gain exposure such as through mutual or open ended funds, exchange traded funds (ETFs) or by buying stocks of companies involved in producing a commodity, whether it be in agriculture, oil or precious metals. What system can you use to trade commodities?
There are basically two approaches, one based on analysis of fundamentals, that is, how things are in the real world, such as news of drought, wars, famine, new inventions or industrial disputes. You use this information along with research data on supplies and demand (like the CRB Yearbook) to figure where future prices are moving.
Alternatively, technical analysis uses charts and historic data, where the system attempts to predict price movements according to different theories and chart principles. The choice of research and analysis is up to the individual trader who is keen to get into commodity trading. You should be fully aware of the potentially volatile nature of these markets and trading methods, which can provide significant profits but equally lead to potentially large losses.
You are strongly advised to seek professional guidance from your financial advisor before starting to commit your real money to commodity trading. Derivavtives can involve a substantial loss of your capital.
|
