Commodities refer to materials and primary products that make the global economy. Commodities like gold and silver, energy such as crude oil and natural gas, are indispensable to numerous industries globally. CFD trading has recently emerged as a favoured approach for investors who want to gain access to the commodities markets without actually owning the assets. Traders can trade CFDs on commodities and enter the commodities market with lower margin requirements while exploring an exciting market and diversifying their portfolio.
What are commodities?
Commodities can be categorised into metals, energy, and agricultural goods. Each commodity has its own characteristics and elements that have an effect on their price fluctuations. Below are the most popular commodities you can trade with CFDs.
Agricultural
These include wheat, corn, and soybeans, as well as animals like cattle and hogs. The agricultural goods can be influenced by factors that include weather, crop reports and global demand.
Energy
This category encompasses goods such as crude oil, natural gas, and gasoline. The energy commodities are extremely prone to geopolitical events and tensions, supply and demand as well as economic indicators.
Metals
Metals are further classified as precious metals such as gold, silver, and platinum, and industrial metals including copper, aluminium, and zinc. Precious metals are usually considered safe-haven assets which investors prefer during economic uncertainties. Industrial metals are affected by factors such as industrial production, construction activities and world trading.
Trading commodities with CFDs
CFDs enable a trader to speculate on price movements of commodities by not owning the physical assets. Traders do not directly take part in trading, instead they enter into contracts with brokers based on the difference between the opening and closing price of the commodity.
Why trade commodities with CFDs?
Leverage
CFDs provide traders with the ability to magnify their profits but there is also increased risk when trading commodities with flexible leverage. That enables the trader to trade with more capital and hence increase their profit margins (including the chance of accumulating losses).
Diversification
By trading CFDs on commodities you can diversify your portfolio and spread risk. Due to the fact that commodities are negatively correlated with the traditional asset classes, they facilitate diversification.
Flexibility
CFDs provide trade execution flexibility with either long (buying) or short (selling) strategies that can be employed on commodity price movements. This means that traders can explore both rising and falling markets, depending on their goals and trading decisions.
Access to global markets: With commodity CFDs, investors can trade on international benchmark commodity markets without taking actual possession of the assets. This gives the freedom and flexibility to traders who are looking to make a profit from any market movement no matter their location and time zone.
Traders may enjoy trading commodities and CFDs as it can be very exciting and rewarding especially when looking to expand one’s portfolio, explore market opportunities, and earn profits. On the other hand, what makes commodity trading attractive to some traders is the fact that it is risky, but also very rewarding. However, trading in commodities requires a thorough understanding of how markets work, as well as risk management basics and use of effective trading strategies.
Tips for trading CFD on commodities
Conduct thorough research: It is a must to study in detail and analyse all the factors that impact the price fluctuations of your chosen instrument before your first trade. Keep track of daily market news, economic information and geopolitical events whose effect might be seen in price levels of certain commodities.
Develop a trading plan
Since failure to come up with a solid trading plan is one of the main pitfalls in commodities trading, having an effective and clear trading plan stands out as a key precondition to success in commodities trading. Establish your objectives of trading, risk tolerance, and strategies for entry and exit before making any trades. Follow the plan and do not make irrational decisions based on emotions.
Conduct thorough research
It is a must to study in detail and analyse all the factors that impact the price fluctuations of your chosen instrument before your first trade. Keep track of daily market news, economic information and geopolitical events whose effect might be seen in price levels of certain commodities.
Develop a trading plan
Since failure to come up with a solid trading plan is one of the main pitfalls in commodities trading, having an effective and clear trading plan stands out as a key precondition to success in commodities trading. Establish your objectives of trading, risk tolerance, and strategies for entry and exit before making any trades. Follow the plan and do not make irrational decisions based on emotions.
Practice risk management
Risk management is one of the key areas that should be given the greatest attention in commodities trading. Establish a stop-loss to limit losses and never risk more than you can afford on a single trade. Diversification of your portfolio would help you to distribute risk across different assets.
Keep an eye on market sentiment
Market sentiment is an important factor in influencing commodity prices. Keep track of investor sentiment and market trends to spot profitable trading possibilities. Do not neglect factors like speculative activity, supply and demand dynamics and geopolitical tensions.
Utilise Technical Analysis
Technical analysis is the process of looking at past prices and chart patterns to detect trading signals.
Practice patience
Commodity markets can experience fluctuations and go through phases of horizontal movement or trend reversals. Have patience and wait for the high-probability trading opportunities that suit your trading strategy and risk appetite.
Stay disciplined
Follow your trading plan and avoid acting on gut feelings or short-term price movements. Stick to your trading plan and don’t fall prey to making quick profits or predicting market movements.
Famous commodities traders
Richard Dennis
Dennis was a commodity trader who became famous for his Turtle Traders experiment that took place in the 80s. He took apprentices, who were later referred to as the Turtles, through his proprietary trading system that proved to be very profitable.
Paul Tudor Jones
Jones is a hedge fund manager as well as a commodities trader who is renowned for his macroeconomic trading strategies. He successfully forecasted the 1987 stock market rout and is now a well-known trader in multiple assets (such as commodities).
Jim Rogers
Rogers is an investor, author and commodities trader. Together with George Soros, he founded the Quantum Fund and has gained significant profits trading gold, silver, and agricultural products.
Marc Rich
Rich was a commodities trader and the founder and CEO of the commodities trading firm Glencore. He transformed the commodities trading industry by being the first to establish the spot oil trading and building a global empire of commodities.
Andy Hall
Hall is a commodity trader nicknamed “The God of Crude Oil Trading” for his mastery of oil futures trading. He has been quite successful in trading energy commodities and is mostly known for his profound knowledge of the oil market.
Risk management
Risk management is one of the key areas that should be given the greatest attention in commodities trading. Establish a stop-loss to limit losses and never risk more than you can afford on a single trade. Diversification of your portfolio would help you to distribute risk across different assets.
Keep an eye on market sentiment
Market sentiment is an important factor in influencing commodity prices. Keep track of investor sentiment and market trends to spot profitable trading possibilities. Do not neglect factors like speculative activity, supply and demand dynamics and geopolitical tensions.
Utilise Technical Analysis
Technical analysis is the process of looking at past prices and chart patterns to detect trading signals.
Practice patience
Commodity markets can experience fluctuations and go through phases of horizontal movement or trend reversals. Have patience and wait for the high-probability trading opportunities that suit your trading strategy and risk appetite.
Stay disciplined
Follow your trading plan and avoid acting on gut feelings or short-term price movements. Stick to your trading plan and don’t fall prey to making quick profits or predicting market movements.
Trading commodities with IronFX
You can trade CFDs on a range of commodities and explore opportunities with a trusted and reliable broker. IronFX stands out as a solid broker recognised in the industry with more than 40 prestigious industry awards. With 1.5 million clients from 180 countries, a dedicated team to offer support 24 hours, 5 days a week and a choice of more than 500 trading instruments, traders can explore the financial markets with confidence.
