How to earn money trading commodities?
The advent of commodity trading is currently universally accessible. The commodities market has become one of the fundamentals of the global trade system. It is not just using currencies that you can trade-in. Most recently, you can trade using commodities such as gold, and agricultural products. Unfortunately, most Forex traders have overlooked the possibility of profiting over commodities.
US Dollar as the biggest commodity driver
The value of the US dollar is one of the biggest commodities drivers. The majority of the traded commodities are in using that currency. Let say we are buying barrels of crude oil. As payment, we would be using US dollars. As per the rule of supply and demand, when there is a big market of the oil, the price goes down. Once the value of the US dollar is rising, then it would be paid less to buy that oil. On the other hand, if the value of the US dollar is declining, it would take a lot more of the US dollar to buy oil. The same type of currency is being used when trading corn, sugar, coffee, and any other commodity. Though some markets allow trading to other currencies, it would be difficult to find them.
Commodity trading is like everything else
The commodity market primarily trades commodities such as sugar, oil, coffee, gold, and many other goods. Commodities can be differentiated into different categories: agricultural products, precious metals, energy commodities, and livestock. What makes commodities different from other goods is that they are uniformed and standardized.
Trading commodities has similarities with other markets. Between commodity and Forex trading, many techniques and approaches mirror one another. Forex traders are known to be the most technical marketplace. It leads to a more competitive edge when trading other markets. Although, Forex tends to be on a looser end than commodity markets which are very much regulated. The emerging market currencies, a subset of the foreign exchange market, appears to have an inverse correlation with the US dollar. This reflects on the growth of commodity currencies. It pays a higher rollover than the market currencies.
Ways to trade commodities
The first recorded commodity trading was dated back in the 17th century. Back then, the exchange of gold coins was used in the commodity markets. Afterward, it then evolved to trading cotton, livestock, and metals. Around the 1970s, it produced a new market in the face of foreign exchange trading. The current century has paved the way for online trading which impacts the system of commodities trading as it became available to people around the globe.
There are various ways to trade commodities. Futures allow trading commodities without physically taking possession of the asset. Futures brokerages require a great level of complexity. It is highly regulated but comes at an expensive price. Costs and interest rates are some factors that affect pricing. Most futures markets provide leverage to some traders. In some cases, traders only have to put little value when buying which can results in greater returns if the commodity is higher. On the other hand, if the price is lower, traders need to cover the risk of the investment.
Another way is to trade contracts for difference markets, often offered by Forex brokers. It is a contract between a brokerage and a trader where the two parties share the difference between the price from the start of the contract until the end. Although, this way is not available in the USA due to local regulations. Some brokerages also offer futures and Forex which is another option for some traders.
The first move is the essential move
There are things to remember when investing in these commodities markets. Being educated is a fundamental factor. Researching and understanding trends are the skills needed to progress. Market size is another factor to assess. Most traders are attracted to extensive markets as they provide more offers. Traders should examine charts and histories before joining. They should keep in mind to allow margin calls if the position changes. Traders should also bear in mind the risks. As much as increasing profits is the main thing, traders should put a limit on avoiding losses. Small losses are acceptable unless they turn into big ones that can be handled with disciplined stops. Investing in a basket of commodities will protect a trader from the unpredictable movements of an individual commodity.
To gain practical learning in trading commodities, a trader needs to do is to open a demo account. This allows traders to use demo dollars to test the waters in trading commodities. With demo trading, you can test trading strategies and familiarize the platform without actually risking funds. Futures brokerages have limited demos. The contract for difference (CFD) brokerage firms offer longer trials.
In the end, there are a lot of ways for traders to gain money. The learning curve is a long path. If one is a technical trader, it won’t be hard to adjust to different markets. Many opportunities for traders to profit by investing in commodities.