How to Invest in Commodities for Beginners
If you trade forex or have experience trading in goods, can you trade in goods too? How should beginners trade them? And what products you should trade in and which ones you need to keep away from? You will find the answers to all your questions with NEXTCENT.
The Essentials of Raw Commodities
Goods are used in trade and as components of other goods. There are also criteria for goods in production and trade. Although the quality of raw materials may vary slightly, commodities are usually similar. In commerce, a product must meet basic standards if it is to be used as an actual physical good.
Peculiarities of Goods Trading
Whatever the tool, dealing is the act of purchasing and disposing of an asset. Rather, you can buy products on exchanges or in the form of merchandise derivatives.
Were all marketplaces the same, it would no longer be a reason to trade various assets. Everyone’s trading has its specific features.
- What first makes markets different is the factors that affect the price of their assets. When we talk about commodities, the demand/supply factor is the cornerstone of price forecasting. A basic rule of thumb: whenever supply increases, the asset’s price declines. As demand increases, the asset’s price rises. So, to forecast the direction of an asset’s prices, we determine what might affect its supply and its demand. Then follow the updates on the supply and demand influencing variables.
- Trading commodities may be very highly volatile, which is why traders must gain expertise before venturing into the market for goods. Eventually, even gold, a shelter asset, has an increased level of uncertainty.
Basic Drivers of Rising Prices for Goods
Certainly, the demand and supply side of the commodity price drives the commodity market. But other factors are also involved.
The market mood
This determines the course of price movements in each individual market. Global political and economic issues drive market sentiment. During times of risk appetite and stability on the world stage, risky values, such as crude oil, rise in importance. Meanwhile, global economic and political issues can push up the market price of safe haven commodities such as gold.
The US dollar
Everything will depend on the dollar exchange rate when you trade CFD commodities. Watch the rate of the dollar to predict the price direction of the product being traded. Should the dollar appreciate, you are likely to see the product price go down.
This world is always evolving, and substitutes for products are being produced. The price of a commodity would depend on supply and demand for its alternatives. When more humans choose an option, the product will fall in value.
The Weather and seasonality
Agricultural products are represented by primary commodities as well. It makes sense to suppose that the Weather Factor will be of great importance, since it defines the supply. One should not forget natural disasters, leading to a reduction in supply and a rise in prices in a short-term perspective.
Listed commodities are utilized and produced in emerging economies. Emerging economies can influence the value of primary commodities. Indeed, China is an important case in point. Events in that country can impact crude oil, copper or iron prices.
You can use its past performance to identify the price direction of an asset. Every significant occurrence is mirrored in the price swings.
The Benefits of Commodity Trading
While the commodities trading market has its pitfalls, the market also provides many opportunities. So if you want to be a professional trader, you will need to know how to deal in different products. Every asset has its special features. So the more you try, of course, the more experience you will get.
Nevertheless, before you start trading, determine which commodity is best adapted to you. Higher-popular assets are more marketable and lower-risk instruments to trade.
Remember also that oil is very fluid. Unless you already have a great strategy for trading high-risk stocks, do not get into the crude oil trade. Newcomers are better served by choosing more secure assets, such as gold. However, keep also in mind that the gold stock market can be very volatile in the short run.
Commodity Trading Tips for Beginners
We have put together some tips that can help you with commodity trading.
- Before you enter the market, research each asset you will be trading. For example, if you are interested in agriculture, learn more about the coffee market. While supply and demand factors are the main barometer of price direction, you should always understand what other factors can affect market movements.
- Don’t chase high profits. Big money comes with increased risk. If you are not experienced enough, you can lose a lot.
- Before opening a position, check all factors that can affect the value of an asset. The economic calendar and news are the main sources of information when trading commodities. Pay special attention to the mood of the world market.
- Even if you are confident in the direction of the asset, keep in mind the risk-return ratio. The potential profit should be at least three times the potential loss.
The commodities market provides a wide range of opportunities for traders. Since it is represented by a variety of assets – from safe to highly volatile assets – you need to determine the assets you want to trade. It all depends on your skills and experience. There is no universal best time to trade commodities, as it depends on the commodity category and the exchange.
Don’t take chances if you lack experience and proven strategies for trading high-volatility assets.