Trading commodities is a specific area of trading and it is not recommended to get involved unless you have done your research. Commodities include raw materials such as metals like gold, silver and copper, and crops like corn and grains. In order to make money trading commodities, you must understand the market and the various factors that can impact commodity prices. Here we will look at the commodities futures market, though there are other ways to invest in commodities as well.
What are Commodity Futures?
To make money trading commodities, you need to understand how this works. Commodity futures are contracts stating that at a time in the future, when the commodity reaches a predetermined price, you will make or take delivery of a predetermined amount. Commodity traders make money by buying a commodity for a specific price and then selling it at a higher price. When it comes to commodity futures, the buyer makes money if the future market price is higher than the price at the time of purchase, while the seller makes money if the future market price is lower than the price at the time of sale. Commodity traders do not actually take possession of the commodity, but rather a buyer would sell their contract before the date of delivery and the seller would buy a contract before that date.
Understanding Factors that Impact Price Changes
As with any other trading, you need to understand the factors that will impact the prices of commodities before you begin trading. Commodity prices are established by supply and demand. For example, natural disasters will impact the futures prices of crops while economic depression will impact the futures price of metals. It is important to use fundamental analysis and technical analysis when deciding on trades.
- Fundamental analysis – This focuses on studying world events, such as local and international politics, economics, natural disasters, weather predictions and more.
- Technical analysis – This focuses on historical price trends, including patterns and correlations.
Leverage is an important aspect of commodities trading and understanding how it works will help you make money in this type of trading. Leverage means buying on margin, or in other words, buying with borrowed money. This allows traders to deposit a small amount of money, but invest significantly more. This means that small price movements will have a significant impact on your profits and losses.
Practice, Practice, Practice
Before you begin trading with real money, you need to practice. This can be done by making paper trades. First start with your fundamental and technical analysis. Study charts and create a trading system. Work out your entry and exit signals and then try out the system with paper trades that do not risk any of your own money. Monitor the market to see how your trades would have done and tweak your system as needed. Working on your system with paper trades, which do not have an emotional component, can be helpful in finding the system that will work best for you.