Learn the basics of how to trade commodities CFDs. Discover types of commodities trading (precious metals, energy, food crops) and commodity brokers.
Before we proceed with the pivotal question of how to trade commodities, let’s view commodity per se and major commodity types.
A commodity is defined as an essential good or raw material in commerce that people buy and sell. Commodities can further serve as building blocks for more sophisticated goods and services (for instance, steel is used in the construction industry). One more important commodity feature is that it should be interchangeable; a source of a commodity is irrelevant (the US-produced steel should be the same as steel manufactured in Russia).
Commodities evolved at the dawn of civilization. As early as 6,500 years ago, the Sumerians were the first people to utilize clay tokens, a form of money to buy livestock. Traces of trading rice at roughly the same period can be found in Chinese culture. The ancient world preferred exchanging gold/silver for goods and services as a means of commerce. Gold became the first universally traded commodity; gold as an investment is still one of the most popular commodities worldwide.
Nowadays, commodities are traded on mercantile exchanges that specialize in one or more commodities (e.g., The Chicago Mercantile Exchange or the New York Mercantile Exchange).
Commodity prices fluctuate a lot. They can change throughout the trading day or over the course of decades. Commodity prices can be determined by supply and demand. Apart from these major economic issues, other factors affect commodity prices: emerging markets, the US dollar, substitution, weather, etc.
The sphere of commodity trading is thrilling – fortunes can be made and lost here. To be on the safe side, you need thorough knowledge about how to trade commodities, as well as the specific features of the individual commodities you prefer.
Most people who trade CFDs on commodities never actually possess them. One of the ways to trade commodities without acquiring ownership of the quoted commodity is via commodity CFDs, or Contracts for Difference. CFDs are contracts between a trader and a broker. These derivative financial instruments allow traders to speculate on price fluctuations between the time the trade is opened and closed. One of the key features of CFDs is that they give leveraged exposure to the underlying asset. With leverage, investors can increase their trading power within the platform. While the use of leverage is tempting, it increases the risk of investors to lose their money proportionally.
For example, when the value of the underlying commodity increases and the client-investor is long, the value of the CFD will increase and at the end of the contract the company will pay the difference between the closing value of the contract and the opening value of the contract.
Alternative, if a client-investor is long and the price of the underlying asset falls, the value of the CFD will decrease and at the end of the contract they will pay the Company the difference between the closing value of the contract and the opening value of the contract. (Therefore, it is crucial to acquire in-depth knowledge, comprehensive training, and a detailed understanding of how to trade commodities CFDs before plunging headlong into trading.
You need to bear in mind that trading commodities CFDs, like any market speculation, is a concept that requires experience, talent and dedication, as well as substantial knowledge of how to trade commodities CFDs and high risk derivative financial instruments. Even then, it's extremely risky.
Let’s delve into more details on how to mitigate your risks in CFDs on commodities trading. Here are some ways how to deal with risk:
Position sizing refers to the size of a position or to the parameters or dictates capital allocation on a trade or size you should use to meet your risk tolerance requirement.
One way to assure that minor losses don’t turn into significant ones is to place disciplined stops on assets’ trades.
Diversification is the process a trader can follow to mix a variety of investments within the same portfolio. Although it does not guarantee loss elimination, it provides a way to manage long term risk within their investment. There are certain disadvantages, e.g. lower potential profit.
101Investing is the online trading platform that give access to CFDs on commodities trading experience with the approach that puts a trader at the center. Transparent trading process, immediate hassle-free access to the preferred assets, friendly customer support service, make the broker stand out from the competition. Every trader receives the whole package of advantages the very moment they register:
101Investing is operated by FXBFI Broker Financial Invest Ltd, 79, Spyrou Kyprianou Ave., MGO Protopapas Building, 1st Floor, 3076, Limassol, Cyprus, regulated by CySEC, license number 315/16.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89 % of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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