Commodities include raw materials or agricultural products that you can buy and sell. They have an active market where prices change daily depending on supply and demand. They generally fall into four different categories: softs (coffee, cocoa, sugar), metals (aluminium, silver, gold), energy (oil, natural gas) and livestock (pork bellies).
Different commodities have different risk factors. The specific risks vary widely; some are highly correlated, making them perfect hedges for one another, and some are not. Absolute price risk is the same for all of them, but they do differ in storage costs, currency risk, and political risks.
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Commodities have a strong market with substantial liquidity. You can trade with commodities 24 hours a day, five days a week, and it is possible to buy and sell futures contracts that are not subject to any capital gains tax.
Who you choose as your broker will depend on who offers the best rates for what you want to achieve. Make sure you select a regulated brokerage as there have been many scandals in this area. When trading commodities, it is not just about the rates but also convenience and expertise, so it pays to shop around. An example of a brokerage to consider is Saxo, who also offers CFDs on various commodities. Contact them to open a CFD account here.
What you choose to trade will be determined by who your broker is and your specific goals. For example, a hedge fund manager looking for a commodity that provides the perfect hedge against inflation might opt for pork bellies, while an investor just wanting to bet on price movements may opt for silver instead.
Some commodities such as gold are more likely than others to offer better hedging opportunities; some such as natural gas are not at all correlated, which makes them prime commodities if speculating is your only motive. As with any form of trading, it depends on what you are trading and why you are trading it. If you want your commodity to offer a high degree of hedging opportunities, then go for something like gold against the Australian dollar. If it doesn’t matter whether or not you hedge, go for something with good capital growth potential, such as silver.
Predicting prices is hard work, but it can be fun too. Whether you choose metals, energy products or softs, it is essential to remember that risk management should always come first. Significant gains can be made in commodities, but there can also be severe losses, so never risk more than 10% of your account on any single trade. Keep your trades small so that you can build your confidence steadily.
For retail traders, the following are some basic principles to ensure successful trading.
- Make sure you have a stop-loss order in place on every single trade.
- If the price moves against you, then get out straight away, don’t let it turn into a more significant loss than it is already.
- Set realistic profit targets and plan your exit points before you buy anything.
- It’s all about discipline. Always prepare thoroughly before making any trades – never dive in without finding something of interest first.
- Many online resources can help you with research – make sure you take full advantage of them because they will give you an edge over other traders who don’t put in this extra bit of preparation.
- And remember to keep it simple.
Your success depends on how you choose to trade, what your broker offers, and your goals. As long as you understand that there are risks involved, commodity trading can be very profitable – whatever your goal or product you choose. It’s simply a question of finding the best broker for the product you want to trade and then taking advantage of that product’s unique characteristics to achieve your desired results.