Forex, Forex strategy

Why are Commodities Ideal for Commodity Trading

The commodity market is among the oldest financial markets. Today, innovations in the financial industry allow traders to trade commodities via derivatives like CFDs or on the futures market.

Trading commodities via contracts for difference comes with various features. Read on for more insights on why commodities are ideal for CFD trading.

Understanding Commodities

A commodity is a tangible product that is often a natural resource. Similar commodities are said to be equal regardless of the manufacturer. Interchangeable commodities are not defined by quality or brand, and the market performance, demand, and supply determine their price.

Commodities are Ideal for CFD Trading Because:

Demand and supply play a big role in determining commodity prices as previously mentioned. When demand is higher than supply, the commodity price rises and vice versa.

The advancement of large economies such as China and India has triggered increased demand for specific commodities like energy and metals. Further, economic changes triggered by the prevailing pandemic had influenced the rise and decline in value for a wide range of commodities.

As a result, CFD commodity trading has become the go-to venture due to its ability to sell short and buy long amid market variations.

What are the Pros of CFD Commodity Trading?

CFD commodity trading can be beneficial because:

  • Investors and traders do not need to deposit a large percentage of the whole commodity value to open a position in the market via margin trading.
  • Traders can gain from an increase in the commodity value without purchasing or even owning it
  • Traders can short a commodity whose value is declining, enabling them to gain from bearish markets

Drawbacks of CFD Commodity Trading

Here are some of the disadvantages of CFD commodity trading that every trader should know.

Traders will never take ownership of the underlying commodity in CFD trading.

CFD commodity trading is prohibited in some financial jurisdictions like the US.

Losses can be as grand as profits. Whenever the markets fluctuate against your predictions, you will incur a loss. Margin trading could expose you to more losses than your original investment.

CFD Commodity Trading Strategies

CFD commodity trading does not fall in the same group as investing in institutional stocks. Seeing that CFDs come in handy for a short-term investment, traders will be highly likely interested in using short-term day trading strategies for commodity trading. A trader should monitor market opening hours.

Remember, CFD commodity trading hours will differ depending on the products you are trading. You can conduct CFD commodity trading as long as the tangible commodity market is open for operations. Other appropriate strategies you can use to remain afloat in the CFD trading industry include:

  • Keeping a tab of current affairs
  • Scalping
  • Hedging

How to Venture in the CFD Commodity Trading Industry

Choosing your preferred broker is one of the critical tasks you should execute before venturing into the commodity trading industry. Here are some tips to ease the selection process.

·         Check the Potential Broker’s Margin

Are you planning to utilize leverage in your CFD commodity trading strategy? Confirm whether the potential broker offers low margin and high leverage rates.

·         Spreads

Often, CFD brokers earn money from bid-ask spreads. In this case, the advertised commodity price will be higher than the actual market value, while the selling price will be lower. When the spread is smaller, the market will need to move less for you to gain a profit.

·         Fees and Costs

If you plan to hold a position, your broker will charge you interest which often increases each day you continue holding the position. These costs vary from one broker to the other, and you need to choose the broker with the lowest charges.

·         Reputation

How popular is the broker? In this digital age, you can easily read broker reviews online. Doing so helps you make an informed choice.

Initiate Your Position

Before initiating any position on your preferred commodity consider investing an amount you can lose comfortably. Placing a position on your broker’s platform is a simple process. You then get an option of either buying (going long) or selling (going short) your preferred commodity. If you opt to buy, you will earn profits when the commodity prices increase, and vice versa.

·         Track Your Position

CFD commodity trading can be risky, and losses are more likely to occur than profits. You will need to track any of your open positions. Once the market you invested in starts fluctuating in the wrong direction, consider exiting the position to avoid losses. You can place a stop-limit on your platform to outline your preferred loss limit.

Finally

CFD commodity trading makes the commodities markets more accessible. As result, retail traders can earn profits from price fluctuations of natural commodities without the challenges they would encounter from purchasing goods physically. CFDs facilitate automated trading, margin trading, and commodity shorting.