Want to learn more about commodity trading? Get more info by reading this article. This overview will serve as a guide, especially for new commodity traders.
What Is Commodity Trading?
Commodity trading is the process of trading commodities like metals, livestock, and food. Commodities like these have values that are constantly changing as the demand for them decreases or increases. Traders don’t sell or buy commodities outright. They buy a futures contract instead. It is a contract stating that they would be buying or selling a commodity at a specific date in the future. Hence, before the date of the delivery of the commodity, they sell the contract.
The trader bets on which way the prices would move – whether the prices would fall or rise. A short contract is where the trader thinks the prices would fall while a long contract is where the trader thinks the prices would rise. The trader will make a profit if their guess is, right but if not, they would lose money instead. In case the change in the price of the commodity makes the trader’s contract value less, a trader may need to spend more money to keep the contract.
To minimize the risk in commodity trading, the traders can order an offset. This limits the losses if in case the commodity has hit a specific price point. Traders should monitor the pricing fluctuations as well to minimize the losses that the offset trades didn’t cover.
Common Commodities That Are Traded
Gold is a commodity that is often traded for the reason that its value hardly decreases. It also performs well even during economic upsets and crises. Apart from gold, traders also trade crude oil as it serves as a fuel source for different countries in the world. On the other hand, as coffee is highly consumed globally, it has also become a popular commodity to trade together with base metals that has many uses like serving as a protection to more reactive metals and lead batteries.
How The Process Works
The first thing that a trader needs to do is to contact a commodity broker, especially one who specializes in online trading. The broker needs documentation in order for them to be able to open an account. In this process, one may need to disclose financial information. The broker would be the one to identify what risks come in the trading process. After that, they would need to find a reliable trading platform. It would be best if the platform comes with useful tools like charts and strategy analysis.
After an account has been created, the next step would be to fund it. Before trading with actual money, the trader is suggested to have a well-researched plan or try out simulations first. It would also be better for the trader to learn the fundamentals of the demand and supply of the commodity they are planning to trade. After that, they can now choose their trades. The trader should avoid overtrading as much as possible.