Commodity Trading Tips that even beginners will understand
If you are thinking of starting commodity trading, you must first know about the commodities, its history, its type, the ways to invest in commodities, and some useful commodity trading tips.
What Is A Commodity?
A commodity is a raw material or basic good in commerce that institutions or individuals sell and buy. Commodities can be contributors to building more complex services and goods. The difference between other types of goods and commodities is that commodities are standardised and can be changed with the same type of goods. So commodities are fungible, which means that two equal units of the same commodity cannot have different prices around the world.
Usually, commodities are grown, produced, extracted, and traded in huge quantities; enough to support liquid and efficient global trading markets. These markets offer a clean way for commodity producers, traders, and consumers to transact business. Examples of commodities are wheat, corn, oil, copper, etc.
History Of Commodities Exchange
Commodities are said to have existed since the inception of human civilisation, although the exact location and timing remains unclear. Ancient civilisations traded a wide range of commodities, from spices to seashells. The power of empires could be seen as proportionate to their ability to manage and create complex trading systems and conduct commodity exchange, serving as the driving agents of commerce, taxation, and economic development for a kingdom’s treasuries.
Evidence suggests that rice may have been the first commodity to be traded, since the Chinese started trading it 6,000 years ago. In 4,000 B.C., the Sumerian civilisation (modern-day Iraq) started using tokens made of clay to purchase livestock. Buyers would keep the clay tokens in packed clay vessels and note down the times, dates, and quantities of the exchanges on writing tables. Merchants would sell goats to the buyers in exchange for the vessels.
Merchants then began using seashells and pigs as money to purchase commodities. Later, Romans and Greeks settled on using silver and gold as the favoured currencies for commodity business, due to their physical beauty and lustre. Eventually, exchanging services and goods became the preferred way of commerce in the ancient world, and it became the first widely exchanged commodity.
Ways to Invest In Commodities
Before you jump into commodity trading, remember that the market is driven by supply and demand. This means that lower supply increases the demand, which in turn drives up the prices, and vice versa.
One commodity trading tip is to thoroughly understand how the market works. Bearish or volatile markets find scared investors hurrying to transfer money to gold, since it has been viewed as a dependable and reliable precious metal for a long time. Precious metals may be used as a hedge against periods of currency devaluation or against high inflation.
One useful commodity tip is to invest in crude oil. Due to reduced oil outputs from wells worldwide, and global economic developments, oil price is likely to rise with its incessant demand.
Futures
A common way to invest in this market is through a futures contract, which is a contract to sell or buy a specific quantity of the commodity at an agreed price at a later time. You can buy any type of commodity through futures. The investors who take part in the futures market are speculators and institutional or commercial users of the commodity.
One of the investors is the airline sector, which needs to secure huge amounts of fuel at steady prices for planning purposes. This is why airline companies get into hedging. Through futures contracts, they buy fuel at fixed prices (for a time span) to bypass the market volatility of gasoline and crude oil.
Physical Delivery
Investors can physically buy commodities and store them. For perishable commodities such as wheat, soybeans, and corn, or commodities that require special handling, such as uranium and natural gas, this method is impractical.
However, commodities such as precious metals, livestock, etc.,can be physically purchased.
Options
Many investors sell or buy stocks of companies in commodity-related industries. For example, if an investor wants to invest in oil, they will invest in refineries, tanker companies, diversified oil companies, or drillers. Similarly, someone wanting to invest in gold would invest in smelters, mining companies, refineries, or firms dealing with bullion.
Equities are believed to be less prone to price swings than futures. Additionally, stocks are easy to hold, buy, track, and trade, and it is now possible to limit investments to a specific sector. Of course, investors have to do research to ensure that the company they are willing to invest in is both a valuable company and commodity play.
Stock options that need a lower investment than purchasing stocks directly are another means to invest in commodities. While the risk is defined by the cost of the option, it is typical that movement of the price will not directly imitate the underlying stock.
Commodity EFTs
These are financial instruments that transact as share on exchanges in a similar manner to stocks. Several EFTs invest in options on futures or commodity futures, while most of them invest in shares of companies producing particular commodities. Many of them also invest in physical commodities such as bullion.
EFTs that invest in futures, physical commodities, or options, come with the same rewards and risks that individual investments in these products do. Similarly, in the case of shares of companies, the EFTs come with the same rewards and risks as investing in individual shares.
Contracts For Difference (CFD)
These are other derivative instruments that can be employed to invest in commodities markets. They are basically a contract between a brokerage firm and a trader, at the end of which, the two parties trade the difference between the price of the asset at the time of entering the contract and the price at the end of the contract.
Several regulated CFD brokers provide CFDs on both the shares of commodity producers as well as the commodities. Customers have to deposit funds with the broker, and these funds serve as margin. One main benefit of CFDs is that the trader is allowed to have exposure to commodity prices without needing to buy EFTs, shares, options, or futures.
Commodity Trading Tips For Beginners
The commodity market is enormous and offers innumerable ways to make profits from it. If you follow the following commodity trading tips, in the long run, avoiding losses and earning profits is possible. One of the key tips is to be patient and stay practical.
#1 Commodity Trading And Stock Market Are Different
One of the most important commodity trading tips is that the strategies that work in the stock market or other trading are unlikely to work in commodity trading. The factors influencing the prices of commodities are different to those affecting the prices of stocks.
Also, these two markets have different thumb rules and opposite trading patterns.
#2 Invest In Multiple Commodities
One of the main commodity trading tips is diversification, so you must not keep all your eggs in the same basket: keep a good balance between rewards and risks. This way, even if one market does not move in your favour, you can still protect your capital.
#3 Understand The Logistics
Entering the market prepared is one of the most logical commodity trading tips. You must know the best time frames to trade commodities, how to read charts relating to your commodities, and how to read and interpret the news regarding your investment. You should be able to apply average trade pricing (ATP) to the charts.
#4 Use Particular Technical Analysis Methods
One of the most commonly used commodity trading tips is to use technical indicators meant only for a commodities marker. You can use methods such as ATP Crossover, double stop-loss orders, etc., to buy and sell the commodities at the right time.
#5 Apply Tricks Specific To Each Commodity
Each commodity has a unique characteristic, and these characteristics determine how it should be traded. Before you start trading, read all the commodity trading tips related to the particular commodity you want to trade.
For example, the prices of commodities such as oil are determined by inflation, whereas the prices of agricultural commodities are defined by demand and supply.
#6 Follow The Basic Trading Rules
One of the most important commodity trading tips is to adhere to the basic trading rules. You must not overtrade, like any other trader. You should only trade for the amount you can afford to lose. You should effectively use all the methods of keeping the losses at bay and the capital intact.
#7 Identify Bullish And Bearish Patterns And Act Accordingly
The best time to purchase a commodity is when its market shifts from normal to bullish, and at this time, you must hold stop loss for those positions that are below the support level, and square off the long positions once the market goes back to neutral. Similarly, bearish market calls for selling. If you understand this well, it could be one of the most helpful commodity trading tips.