Commodity trading is a sophisticated and exiting method of investment. The market works similarly to the stocks market except that it is traded in assets. Commodity traders focus on the selling and purchasing of commodities such as gold instead of stocks and company shares. The commodities are purchased with the main of aim of making profits in the future. The investors achieve this by buying the particular product then keeping it for a certain period until its prices increase so that they may sell it.
Definition, players, and marketplace of commodity trading
A commodity is either produced in the industry or grown in the farm. Some examples of products include cattle, gold, cotton, orange juice, wheat, sugar and silver which usually are sold to the national and international markets. Their prices depend on the forces of demand and supply. Traditionally, the large businesses have been the primary market participant’s, but the technology advancements have made the market available to an extensive range o people.
Individual commodity trading investor
With the advent of commodity brokers and the internet, individual traders can now trade in the commodities market. Since the individual traders do not require the products as much as the companies do, they only trade with the aim of making a profit. They make the profit at a convenient time when the prices are low and then sell them again when the prices are high, and the demand is also high.
Commodity trading strategies
There are three main commodity trading strategies:
- Fundamental trading strategy– fundamental trading is based on the current forces of demand and supply. For instance, you can purchase soybeans because the weather is becoming dry and the beans will not be available in the market.
- Trading breakouts strategy– this strategy is centered on the commodities breakouts which mean that a trade will buy or sell a product depending on the highs and lows in the market. The plan is used by professional traders to manage large amounts of money while waiting for a major market trend.
- Range trading strategy– this is making purchases at the bottom support range and then selling them at the resistance range. This strategy is considered to be successful if the trader buys the commodity in an oversold market condition.
What moves the commodity markets?
Many factors move commodities, just like in forex trading. For example, what affects gold price may not move the price of cotton.
- Interest rates- a decrease in interest rates decrease the return of investments. This can also make the price of some commodities such as gold lose its appeal.
- Dollar strength- most commodities are priced in dollars. When they do, the price of the commodities increases.
- Weather- the soft commodities such as wheat, cotton. Coffee and other crops are susceptible to weather. Weather can also affect the supply chains.
- Industrial demand- metals and energy are driven by market demand forces.
Commodity market trading facts you should know
- Commodity trading is among the oldest professions because even our ancestors traded goods
- Non-professionals can participate in the commodities markets provided that have a business mind
- There are two main types of commodities: the hard and the soft. Hard commodities are the natural resources while the soft commodities are livestock and agricultural products
- Not all commodities can be traded. For instance, you cannot trade water, tomatoes, electricity’s, carbon dioxide or eggs in the commodities market.
- Commodity trading is governed by standards which ensure that all commodities are inspected firsts.
- You can use commodities in stocks
- It takes patience to make a fortune in the commodity trading market. Don’t expect to get large profits overnight.
Commodity trading is a safe way of making a living. However, there are multiple factors that the trader must consider for them to become professionals. Each country has its own standards and regulations which abide them. There are also some commodities which can be accepted in the market, and others cannot be. Make sure you understand the basics before you start trading.