Trading in commodities can be a very rewarding but also a highly risky proposition. The markets for most commodities are extremely volatile and offer the potential for enormous gains or losses, sometimes within just a few minutes. With the risk comes the attraction for many as a chance to earn several thousand dollars in just a short time can be an opportunity too good to pass up. Nonetheless, in order to be successful, there are several commodity tips that you should grasp.
A Breakdown of Commodities
The good news about commodities is that it offers an intense and exciting way to diversify your investment portfolio. You can earn quickly because the returns come much faster than traditional stocks and bonds. The most common way of trading commodities is with futures. Futures are a standardized contract to buy or sell a fixed amount of a commodity such as gold or oil for delivery at a specific date in the future. Silver is sold in contracts of 5,000 ounces and oil at 10,000 barrels. They are sold on different futures exchanges that specialize in different commodities. In order to trade commodity futures, you will need a broker and a margin account. A great place to start is through gaining basic understanding of commodity markets, related derivatives, and financing structures.
When you purchase a future, although you are buying a contract for say 5,000 ounce of silver worth approximately $100,000, you only need to put down a much smaller amount called a margin, which at the moment for silver is set at $9,900. The margin is the money that you are putting at risk when buying a commodity and a large movement can wipe it out in a single day.
Select Your Commodity
Trading commodities successfully is largely about knowledge. The more you know about a particular commodity and what affects it, the greater your chances of making a profit. With that in mind, you should choose the commodities that you would like to trade from the four main sectors.
- Energy such as oil, natural gas and gasoline.
- Metals such as gold, silver and copper.
- Livestock and Meat such as pork bellies, hogs and live cattle.
- Agricultural such as soybeans, coffee and sugar.
Your best bet is to pick a couple of commodities from the same sector because it will cut down on the amount of research you will need to do. Do not try to invest in too many different types of commodities as specializing will, without a doubt, drastically increase your profitability. Lex’s Technical Trading Strategies for FX will help you figure out when and how to trade.
There are three areas that you need to study before you can even think about commodity trading. The first is how the market itself works. Look for an in-depth guide to trading commodity futures, and find out which exchange your chosen commodities are traded through. Make sure you are familiar with the margin payments required for your selected commodities as they are different for each type. Know how much profit or loss you will make from the change in the price of your chosen commodity to assess if the ones you have picked are suitable for your risk appetite. This is called Investing Fundamentals.
Once you are confident you understand how the fundamentals work, you need to look into the key macroeconomic factors that impact the movement of your commodities. For example, the price of gold tends to rise when inflation is increasing, or there is a recession on the horizon. Oil, on the other hand, is more affected by conflicts in certain regions and the stability of foreign governments. These are the overall factors that can send the prices of a commodity skyrocketing or tumbling. So, knowing what they are will enable you to react more positively when you see a piece of relevant news.
The final area you need to comprehend is the finer details of the commodities you are planning to speculate with. Who are the main producers and what kind of situations can affect supply? Details are crucial as there are thousands of analysts around the globe researching commodities all day long and and they advice professional traders on courses of action. Look for reliable sources such as newspapers, online publications and learn how to read commodity price charts.
Trade without Using Money
Before you start investing your hard earned cash, do your research and start to trade the market without actually purchasing anything. Set a budget similar to what you are actually planning on investing and buy and sell based on your current understanding of the markets and the news. Do this for an extended period of time. You will notice some of your news sources are better than others. This kind of fine tuning will allow you to develop a feel for your commodity, and it will help you to avoid losses once you are ready to actually risk your money.
Close Your Positions
One of the most important tips when trading commodities as an individual, is to make sure that you close your futures positions each day and be absolutely certain to close them before a weekend. Exchanges only operate for a fixed trading period each weekday, but the news that affects the prices of commodities never sleeps. Events can occur outside of the exchange hours that might cause the prices of your commodities to open the next day at a price that is vastly higher or lower than it was at the close of business the previous day.
Commodity trading is a very interesting way to earn money. Because of the nature of the information you will be learning a lot about the world every day just to keep informed regarding future movements. These are described in Commodity Training Tips: Learning the Basics. By using these commodity tips and being diligent in your research, you will find that you will start making a profit more often than you make a loss. Try to keep things in perspective. This is because no matter how good your information, you will still make losses as well as gains. However, if you make more gains than losses, you win!