Trading commodities

A Wealth of Knowledge

Yonela Ngulugulu 25 Jul 2018

Commodities, unlike currencies are in some instances affected by different news than those that affect the currencies. This articles seeks to explore different types of commodities and the factors that have impact on them


Commodities


Although the commodities market is different from the forex market, it is important to allude to the fact the trading commodities is much like trading the forex market in many ways. depending on the broker that one is using, the number or types of commodities that one may have access to will vary. To add to that, there are many ways to access the commodities markets, through the futures markets, CFD markets and many other types of markets. The market with which one chooses to access the commodities market is largely dependent on one's account balance. This is due to the fact that there are different margin requirements and leverage offered per market. generally speaking, the futures market tends to be somewhat more expensive than the Forex market due to the leverage offered in that type of market, it is significantly lower than or as compared to the forex market. This then calls for a much higher margin requirement for one to participate in such a market.

the account size is important

Contract sizes of the Futures market

The account size makes all the difference especially when it comes to the Futures market as already pointed out above. In the futures markets, one can only trade different commodities and only standard contract sizes and no less than that. For one to place or execute a trade in a commodity of their choice whether a buy or sell, a certain margin is required for one's trade to be honored/activated much like in the Forex market. It is for this reason that the Futures market are deemed expensive in comparison to the Forex market. Also, it is important to understand that different commodities have different margin requirements. SOme commodities cost less to trade than others. With this being said, some commodities require at least $5000 worth of margin for one to trade one standard contract.

Traders to whom the Futures market may be expensive to trade, CFDs market may be an alternative as it allows for one to trade contracts lower than standard contract sizes. This is due to the fact that it is a different market from the Futures market. In the CFDs market, one opens contracts with their broker of choice and makes money or loss based on the difference between the price in which they opened the trade and the price in which they closed the trade. As such, the CFDs market is, therefore, an option one should consider.

Thirdly, apart from trading commodities through the Futures market and the CFDs market. One may also trade or access such via the options market. However, options are significantly expensive/cost more to trade.

Commodities are influenced by different macroeconomic events

Soft commodities

It is important to note that the factors which influence/affect the commodities are different from ones that one is already familiar. There are some factors which are unique to the commodities market. Unlike the stock market whereby one is trading a share in a certain company or the forex market whereby one is trading/ buying and selling a share from a country's economy. In the commodities market, one is trading actual things. Firstly, it is important for one to understand just what we are referring to when using the term "commodities". This is not only Gold, Silver, Oil, Coal but it covers a broad spectrum of natural resources that are normally grouped into the following groups: metals, soft, energy etc. The term also covers things such as vegetation: wheat, rice, coffee, beans etc. Now to allude to the type of factors that affect these markets. Several years ago, there occurred a series of floods in the river of Mississipi and this had a negative impact on wheat prices as it translated to less supply which then prompted an increase in the price of wheat.

Precious Metals

Soft commodities are those type of commodities that grow in the earth surface such as vegetation. This is firstly largely affected by weather more than anything. Now as already established before, it is not easy to keep track of weather patterns as they change constantly. It is for this reason that trading stocks and currencies is different from trading commodities as with stock and currency trading one does not have to consider the weather of certain countries. More often than not, one will be concerned with data such as the: unemployment rate, interest rates, GDP etc. Whereas agricultural rarely look at such data and focus more on weather patterns and many other naturally occurring events that could potentially affect the crop yields.

Another class of commodities as mentioned above is Precious Metals, these are completely different from soft commodities as these to some extent do in fact react are affected by interest rates determined by the Federal Reserve Bank. The U.S Dollar is considered a safe haven as it is normally a stable currency and a strong resilient one at that. Therefore, in a case whereby the Dollar is strengthening, this is going to affect precious metals as often times invest flee the Dollar and invest in the precious in times of uncertainty. TO add to this, precious metals are priced in Dollars, therefore, keeping the commodities becomes unattractive to investors when the Dollar itself is strengthening.

Precious Metals

Liquidity in the commodities markets

Firstly, as already pointed out above, there are different types of commodities, and some may be traded more than others. For example, Gold is far more liquid than soybeans. So, different commodity classes have not the same liquidity.

Furthermore, it is wise to be cognizant of the liquidity of the market one is trading/speculating in. Simply because the Futures market provides lumber as a tradable instrument, it does not mean that one can trade in such markets, this is especially true for retail traders because the lumber markets are illiquid, as such, are mostly used for hedging. One could compare the lumber market and say USD/JPY or EUR/USD, there is a significant difference between the lumber market and the forex market particularly in the executing and closing of trades. This happens seamlessly in the Forex market when one is trading EUR/USD and USD/JPY and many other currency classes, but this may be untrue when trading the lumber markets.

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