Trading commodities can be highly lucrative,
provided you avoid the myths associated with these financial instruments.
The Benefits to
Trading Commodities
Commodities are heavily traded on global financial
markets. They include primary agricultural products or raw materials such as
coffee, copper, gold, wheat, gasoline, oil, silver, cattle, aluminium and
lumber. Even though commodities are the darlings of experienced traders, many
casual traders and intermediate-level traders are hesitant to trade them.
Among others, various myths abound regarding the
profitability of these tradable assets. In today’s markets, commodities are
easily traded and they do not require traders to actively take physical
possession any products. On a difficulty scale of 1 – 10, many traders are of
the opinion that commodities rank highly in terms of difficulty, but nothing
could be further from the truth.
The good news is that you can generate profits from
commodities, whether the prices are rising or falling. By carefully watching
market movements you can anticipate rising and falling prices and place call
and put options accordingly. With a little insight and market savvy, it is fairly
easy to understand commodities and profit off them accordingly. Every day,
scores of traders generate windfall profits off commodities and this is
entirely possible in bullish, bearish and volatile markets.
How Much Money is Needed to Trade
Commodities?
Depending on where you trade, and what you trade it
is relatively affordable to trade commodities. For example, some brokers will
allow minimums of $2,500 to register accounts to trade commodities. Others may
seek amounts of $5,000 or more. Since leverage is involved, the amount you
deposit is only a fraction of the size of the position you can open.
There are other ways to trade commodities online in
the form of binary options. This method of trading allows for speculation on a
select group of commodities with traders making predictions on future price
movements. Contract positions can be opened for as little as a few dollars per
trade and it is possible for no leverage to be involved.
What to Avoid when Trading Commodities
One of the biggest mistakes that novice traders
make is too much leverage. And this isn’t only for commodities, it’s for
stocks, indices and forex too. Leverage allows traders to place as little as 3%
of the value of the trade down, with the rest being provided by way of
leverage. High leverage commodities are typically traded in futures contracts.
New traders are often overwhelmed by the trading
power of leverage, since it allows you to open far greater positions than your
available budget allows. A caveat is in order though: leverage has incredible
upside potential, but so too is the downside. Traders should limit the number
of futures contracts to the bare minimum when leverage is involved, since high
leverage trades can wipe out your investment bankroll.
Since you are not required to take physical
possession of the commodities you are trading, you only need to watch your
trades to make sure you know when to enter and when to exit. Traders are
advised to be sure to close futures contracts prior to the first notice day,
several weeks prior to the contract expiry. One of the most important rules of
commodity trading is to avoid making poor judgment calls time and again. If a
strategy didn’t work the first time, it’s foolhardy to employ that strategy
multiple times. Since it is not really a zero sum game, losers lose more on
every trade and winners gain less on every trade.
The best advice is to start small, learn from guru
traders and use a demo trading account to get your foot in the door. Commodity
trading is a vocation that requires years of experience. As you increase the
number of winning trades over time, so you will learn how to consistently
generate profits trading commodities. Money management, education and the right
strategy can go a long way towards success in the commodities markets.
Author’s Bio: Brett
Chatz is a graduate of the University of South Africa, and holds a Bachelor of
Commerce degree, with Economics and Strategic management as his major subjects.
Nowadays Brett contributes from his vast expertise for the globally renowned
spread betting and CFD trading company – Intertrader.