How to trade in commodities market
Commodity trading covers the buying and selling of a large range of instruments including oil and gas, metals such as gold and silver and soft commodities how to trade in commodities market cocoa, coffee, wheat how to trade in commodities market sugar. Commodity trading is as old as the financial markets, and perhaps even older than that. The first example of an organised exchange for trading commodities dates back to Amsterdam in These days there are a whole host of markets available to trade with just a few clicks of a mouse or taps on your mobile device, but some commodities remain as popular as ever.
There are a range of commodities you can trade, including agricultural commodities such as corn, soybean and wheat. It's the energy markets, in the form of oil and gas trading, and metal markets like gold and silverhowever, that tend to be more popular with traders these days.
The commodity markets are traded in a similar way to other types of financial markets, but there are how to trade in commodities market points to be aware of in order to avoid any shocks or surprises when dipping your toe into commodities trading. In this article, we focus on two of the more actively traded commodities: As these are slightly different blends of oil, the prices vary depending on which one you how to trade in commodities market trading.
How to trade in commodities market don't just depend on how much oil is being pumped out of the ground, for example. As economies slow and demand drops, the price of oil and other commodities also tends to follow suit. 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 influencing oil prices include decisions by the Organisation of Petroleum Exporting Countries OPEC and other major oil producing nations, such as Iran, on how much oil is produced and supplied to the market.
An ability to try and forecast how well or badly the world economy may fare in the months ahead is a definite plus point when it comes to trading a commodity like oil. But there is plenty of news that can cause fluctuations in the price on a day-to-day basis — and on an even shorter-term scale than that. If for example the US releases figures that show its economy is improving more quickly than expected, this could cause a surge in the price of oil as traders start to bet that demand will increase, consequently putting up the cost of a barrel.
Or it could be that an oil-producing country resists international pressure to stabilise oil prices by increasing production. This could see further slides in the oil price as investors worry that more of the commodity will be produced than is needed.
It really is a market that can be buffeted by plenty of world events, so it pays to stay on top of major economic news releases. Another enduringly popular commodity is gold, which has long been considered a store of wealth and has held a special allure for many of us — as the Californian gold rush back in the s would undoubtedly attest. Traditionally, in times of trouble and market volatility, gold is perceived as a how to trade in commodities market haven' — somewhere for investors to store their money away from other riskier assets.
Although the yellow metal can in theory be traded in many currencies, the typical market quote is to price gold in dollars, usually as 'dollars per troy ounce'. This relationship to the US dollar is an important one and is another factor that will have an influence on the price of gold. If the dollar becomes more attractive to investors and starts to rise, the price of gold will usually drop.
In recent years, some people have seen the US dollar as a safe haven for their money and that has reduced the appeal of gold. This is another aspect to weigh up when trading gold: For example, if the US central bank, the How to trade in commodities market Reserve, decided to cut interest rates, this would normally weaken the US dollar and lift the price of gold.
As with oil, because gold is such a global commodity it pays to keep a watchful eye on the major economic announcements such as interest rates and unemployment figures, which are released on a regular basis. The energy markets are also popular among commodity traders. The advent of renewable energy has generated added interest for commodities such as national gas, heating oil and gasoline. One way to get a feel for commodity markets is to watch their moves over a period of time so you can experience the sort of things that happen and understand what makes prices change.
CMC Markets is an execution-only service provider. The material whether or not it states any opinions is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is or should be considered to be financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
CMC Markets does not endorse how to trade in commodities market offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
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United Futures Trading Company, Inc. Just what is commodity trading? Well lets how to trade in commodities market at first what a commodity futures contract is: A transaction in the commodity futures market is made on the trading floor or in the trading computers of the exchange between brokers who are members of the exchange that particular commodity is trading on. The seller will have a broker, and buyer will have a broker. They will then transact an order for a purchase and sale.
The buyers and sellers of commodity futures contracts have obligations. The buyer is obligated to take delivery and pay for the cash commodity during a specific time frame. The seller is obligated to deliver the commodity, for which he will be paid the price that was decided in the exchange pit by the brokers. Sometimes the price can be more or less depending on the grade quality of the specific material.
The buyer and seller can eliminate their obligation by offsetting their trade at the exchange before the contract comes due. This is what most speculators do in the commodity markets. There are speculators and hedgers that trade in the how to trade in commodities market markets. A hedger is not interested in making a profit off how to trade in commodities market movements in price of a commodity futures contract, but rather in shifting his risk of loss on the commodity itself due to adverse price change.
Speculators will buy and sell futures, or options on futures, for the purpose of making a profit. How to trade in commodities market will buy futures a long position when they think prices will rise, or they will sell futures a short position when they think prices will fall. Both the speculators and hedgers add volume to a market making it how to trade in commodities market more liquid market to trade. Most individuals who open commodity trading accounts are speculators looking to benefit off of the price movement of the commodity being traded.
Farmers, oil operators, cattle companies, etc could open a commodity futures trading account looking to be a hedger and reduce their risk of price movement. Here is a simple example of a speculator we will call him a futures trader executing a trade and how it would work.
Once the futures trader has established a futures trading accounthe would then call his broker to initiate a trade. He would let the broker know if he was looking to buy or sell long or shortthe specific commodity he wants the trade in, the month and year of the contract he is looking to trade, the quantity, and the price which he is willing to buy or sell for or he can say Market Order to have the trade executed at the current market price in the trading pit.
Sometimes conditions are present when the trade can not be executed for some reason which is rare but can happen. After the trade is executed, the floor broker would relay price paid or sold and relevant information back to the trader's broker. The futures trader's broker would then let the futures trader know the price that the Buy or Sell the trade was executed. In recent times, more trading has been done through the use of online futures tradingeliminating the use of telephones and calling of brokers on the telephones.
The futures trader can trade directly from their computer and have the trade routed directly to the trading floor of the exchange. At the exchange some orders electronic markets are executed immediately in the exchanges computers. This is becoming the more preferred method of trading because it tends to be quicker. He then calls his broker or enters an order how to trade in commodities market his computer trading platform to sell the futures contract he has bought earlier in the day.
Commissions and fees would be deducted from his buy and sell. And remember the risk of loss exists in futures trading. This is just a brief example of how commodity trading works. This in no way explains all the intricacies involved with trading. Trading commodities is risky and one should only use risk capital to invest. Please contact one of our licensed brokers who can explain more in-depth on how the commodity markets work, and determine if you are suitable to trade these fast paced markets.
Also feel free to request a free investor kit from our site. Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results and the risk of loss does exist in futures trading.
All trading rates quoted per side. Applicable exchange, regulatory, and brokerage fees how to trade in commodities market to rates shown. Please email webmaster unitedfutures. Open An Account Now Online! The Basics of Commodity Futures Trading.
Aside from futures tradingsomething many of our customers engage in, there are three popular ways to trade commodities. The first method is through stocks. How to trade in commodities market you want to trade oil, Exxon, Marathon or any of the others fuel companies are options. However, there are problems with that strategy. Trading a company comes with a lot more variables. Is it well managed and are its mines producing as well as others?
How about regulatory or legal matters? The price of the commodity could go higher while the price of the company moves lower for no other reason than a weak overall market. Second method is trading commodity stock ETFs.
If you want a piece of the agriculture market which, in general, reacts to the price of corn and other agricultural commodities, there are agriculture company ETFs. For traders not wanting to trade futures, this is the most correlated way to trade commodities. How to trade in commodities market ETFs track the price of the actual commodity.
Each will track the price differently. Many are based on futures contracts. As those contracts are rolled over, the long-term correlation between the ETF and the commodity breaks down. Be warned that commodities are a hard trade due to volatility caused by world-wide factors that are hard to track. Thoroughly understand the ETFs and the baskets or markets they track before you trade with real money. This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy.
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