Commodity trading is done by way of future contracts (knows also as commodity futures). When trading commodities online you enter into agreements obliging you to pay a certain price for a commodity (such as crude oil, livestock, crops, precious metals or any other product or natural resource), the broker is obliged to pay you according to the commodity's future value.
If the value of the commodity you decided to trade on rises you will make a profit when the broker follows through with the future contract and pays the difference between the initial value of the commodity traded and its value when closing the deal.
The Main Types of Commodities Traded
There are many different commodities which may be traded on, among these the main ones are:
- Fossil fuels for the big energy market. Mainly coal, crude oil and natural gas
- Agricultural crops such as corn, rice, wheat, cotton and others
- Meat and livestock, such as cattle, sheep, chicken or pork bellies
- Precious metals, such as silver, copper, bronze and gold
Advantages of Commodities Trading
There are several advantages to trading on commodities, among these the main ones are:
- Potential for large profits. Commodity futures may be bought on leverage (much like Stocks), in this fashion profits may be multiplied several times over. It is important to remember that losses may also be magnified so a "stop-loss" strategy may be a good idea.
- Solid trading even during periods of market lows. In weak economies, due to inflation, the value of money tends to drop. This drives the price of commodities up and so trading on commodities may be a good way to diversify your investment portfolio and gain protection against inflation.
- Trading solely on stock involves high risk. A diverse trading portfolio, which includes trading commodities by way of future contracts, is a great safeguard against market crashes.
- Minimal costs, commodities trading involve paying much lower commissions as compared to trading on stocks for instance.
Strategies For Trading Commodities
If you're just taking your first steps trading on commodities you may want to stick with one of several basic strategies, among such strategies are:
- Breakout Trading - This strategy is based on identifying the points where a certain commodity's price is about to break a barrier and rise towards a new high.
- Range Trading- By identifying a trend pattern of a certain commodity's value, you can begin trading on it when a down cycle is identified and realize you profits when the value is close to a peak.
- Seasonal trading- Some commodities have typical highs and lows at certain seasons. It makes good sense to begin trading on such a commodity during the time of year when its value tends to be low and realize profits when its strong season arrives.
Diverse Trading Portfolios
It is risky to trade solely on commodities just as it is risky to build portfolios of trading only stocks.Since the value of stocks suffer when economies undergo slumps, trading commodities online provides some protection.
Traders who like short-term trading stand to gain from trading commodity futures since commissions are relatively low. It is important to remember however that paying less for transactions comes with a price of heightened risk since the commodities' market is a relatively volatile one.
An interesting fact about trading commodities is that it is common practice in some industries. Shipping companies for instance purchase future contracts for Heavy Fuel Oil (HFO) in order to stabilize the rates they must charge in order to maintain profitable operation.
If you tend to prefer a solid, low risk portfolio, spicing things up with small dosages of commodities trading is a good way to award yourself a chance for substantial, quick profits.
Feeling ready to begin trading commodities? We invite you to create your user account so that you may take advantage of the advanced trading platform we've created in order to provide traders with the perfect arena in which to manage portfolios.