Traders across the world are always looking for ways to propel the success of their trading journeys and increase their chances of profit with every trade.
Among the many ways this can be achieved, one of the best methods is to diversify your trading portfolio. Essentially, with a wider range of accurate investments across multiple financial markets, you have firmer grounds on which to make profitable trades.
On this note, one of the best markets for you to consider investing in, is the commodity market. With its high liquidity, the commodity market can be a great opportunity for elevating your trade experience.
We’ve put together this complete guide on trading commodities, to show you what commodity trading is, and how it can be beneficial to your trading portfolio.
How Does Commodity Trading Work?
Commodity trading is the process of traders investing in the different price values of various commodities on the market.
This is much like any other form of trading, except in this instance, the assets in question are raw materials and goods.
With the right trading platform, you can trade standard commodities, including precious metals like silver and gold, and natural energy resources like oil and gas.
Also, there are soft commodities available for trading, which include naturally grown goods. According to Skilling, the top five soft commodities traded in the world are: coffee, cocoa, sugar, cotton, and soybean.
As various countries across the world buy and sell these commodities, their values will start changing, and investors can accurately trade these commodities to profit from the price movements.
Traders most commonly opt for contracts for difference (CFD) trading with commodities, where instead of taking ownership of the underlying asset, you simply speculate on the price movements and profit from curate predictions.
What Are The Benefits of Commodity Trading?
Trading commodities can be highly beneficial to traders for a wide range of reasons. These include:
Supply and Demand
The nature of commodity price values is that they’re heavily based on supply and demand, and this can be an advantage to you as a strategic, dedicated trader.
One of the main factors affecting the price values of commodities is their level of supply and demand throughout the world.
For example, if there was suddenly a very low supply of wheat available, but many areas of the world still demanded it as a necessity, then the value of wheat would suddenly increase – thus resulting in the price of wheat going up also.
This supply and demand nature of commodity trading is good for traders, as it can help you predict market performance more accurately.
If you can see how certain commodities are in high or low supply or demand, you can better predict how their prices will behave, and therefore make more profitable trades.
Commodity trading is also beneficial due to the fact traders can incorporate leverage into their trading.
This is a good way to increase your potential profits with each trade, when you use leverage correctly.
This process allows you to gain larger exposure to the market with a significantly smaller deposit of capital. Depending on the asset’s leverage ratio, you can trade up to thousands more on an asset, compared to what you initially put down.
When your trades are successful, it results in your profits being substantially larger compared to your base deposit, and this increases your profits massively.
However, be cautious, as any unsuccessful trades will result in equally substantial losses compared to your small deposit, so it’s important to be wary of this when leverage trading on volatile markets like these.
Trading on the commodities market is highly advantages for traders, as it helps you expand your trading portfolio to new markets with profitable opportunities.
If you were to only trade in the stock market, for instance, you’re essentially putting all your eggs in one basket, and the success of your entire trading journey is based on this market’s performance.
However, investing in other markets like trading commodities, allows you to explore new avenues of profit, and trade assets with different levels of liquidity and volatility, to expand your chances of successful trades.
It’s therefore essential that every trader has an understanding of trading commodities, so they’re fully equipped to make accurate and profitable trades in a range of different markets.