Commodity trading incorporates the buying and selling of an extensive range of instruments; the primary traded commodities in the eyes of the public are Oil and Gold.
Oil and Gold are popular for a good reason, price swings are frequent, and market price fluctuations are constant and well known, making them popular choices for traders.
Commodities are traded on a range of different exchanges and mostly traded as futures contracts. Commodities traded as CFDs give retail traders easy access to trading commodities.
With a CFD, technically you never own the asset, which means it’s easy to trade the commodity, and you can easily buy or sell the commodity whenever you like.
Trading commodities this way puts retail traders and market analysts in a very advantageous situation. Predicting the Crude Oil market will rise due to recent news; you can very quickly and easily place a trade, and profit from the outcome.
Trading Commodities are very “real” to retail traders, topical and political news. Commodities also include energies, such as Gas and other precious metals such as silver and palladium.
Traders are also able to buy and sell soft commodities, traded across a range of brokers. Soft commodities include products such as coffee, cocoa, wheat and sugar.
The History of Commodity Trading
Commodity trading is one of the very first forms of trading and is older than the financial markets, as we know them today.
The first example of an organised exchange for trading commodities dates back to Amsterdam in 1530.
In the modern market place, there is a range of markets available to trade. With just a few clicks of a mouse or even taps on your mobile device, you can be buying or selling Oil or Gold.
Modern-day trading has come a long way, but the principles remain the same and trading commodities are as popular as ever.
How to Trade Commodities
- Choose your market – Choose the commodity, such as Gold, Crude Oil Brent or Natural Gas, select whether your wish to either trade CFDs or spread bet (if available in your region).
- Decide to buy or sell – Buy (go long) if you think prices will rise. Sell (go short) if you believe prices will go down.
- Enter a trade size – Decide on how many units (CFDs) you want to trade or, the amount per point movement (spread betting). Remember, when trading CFDs the value of one unit can vary depending on the instrument you’ve chosen to trade.
- Manage your risk – Depending on your broker, select from a range of stop-loss orders.
- Monitor your position – After placing your trade, monitor your open positions (including any stop orders or take profit orders) to follow your real-time profit or loss. Remember, losses can exceed your deposits.
- Close your position – If your trade is not automatically closed out, as a result of a stop or take profit order, close your trade whenever you’re ready.
Trading Oil can vary drastically in volatility based on day-to-day news and what is happening in the global markets.
Keeping an eye on breaking news is vital for commodities trading.
As with each traded product, there are specific nuances with each commodity; for example, traders need to know there are different types and qualities of crude oil.
The two popular types of oil to trade are:
- Brent Crude
- US West Texas Intermediate (WTI)
These are slightly different blends of oil, so the price can vary depending on which one you’re trading.
Factors that influence the price of oil
When trading commodities, it’s essential to know of events that are impacting the oil markets.
Oil is a great commodity example due to its market price influence. Prices don’t just depend on how much oil gets pumped out of the ground.
Oil is a it’s a global fuel source, this means when the world economy is increasing, and industrial factories are working at full capacity, it stands to reason that world consumption of a commodity such as oil will go up.
As economies slow and demand drops, the price of oil and other commodities also tend to follow suit. In early 2016, crude oil was trading below $30 a barrel, in March 2020, due to the slowdown of the global economy crude oil dropped down to $20 a barrel.
Since oil prices are also impacted by world events such as politics and socioeconomic situations, including the Middle East crisis, it helps as an oil trader to keep on top of news so as not to get caught out by an unexpected shift in oil prices.
Other factors that influence oil prices include; decisions by the Organisation of Petroleum Exporting Countries (OPEC) and other major oil-producing nations such as Saudi Arabia, Russia and Iran, on how much oil is produced and how much oil is supplied to the market.