The market of commodities is not very considered by the retail traders yet very interesting. It has peculiar features, which determine significant opportunity of profit, comparable with the Forex or the shares market.
Contrary to common sense, investing in commodities is no more complicated than investing in the more famous and popular asset classes (such as currencies and shares).
Surely, it is a particular market, which presents also singular dynamics. Therefore, it is necessary to create a technical toolbox ad hoc and employ it making the right choices. Firstly, the broker. The choice of the broker affects the trading of commodities more than the other kinds of trading. The best broker is the one which, among other things, offers a rich range of assets and proposes convenient economic conditions (spreads and commissions).
Key To Markets meets this description perfectly. Therefore, if you think commodities is your vocation, we advise you to open an account with this broker and start trading.
Commodities: general features
As already mentioned, commodities are very particular assets, as proved by some peculiarities.
The market of commodities is characterised by extreme volatility. From this point of view, it is second only to the shares (and the cryptocurrencies, which are a separate matter) This feature surely has positive sides to it. In fact, the highest opportunities of profit, for a trader, come from the differentials of pips that occur during the normal trading sessions.
Nevertheless, it also hides a dangerous dynamic. In the vast majority of cases, in fact, volatility is synonym with unpredictability. Anyway, the volatility can become a very useful resource, for those who are able to manage it.
Differently from many asset classes, and in particular the currencies, the prices of commoditiesare influenced by “real” factors, which go beyond the concept of exchange. Moreover, it is more difficult that they are hetero directed (let us think about the power the central banks exercise on the various national currencies). This creates a marked readability, although this is experienced through techniques and methodologies often extraneous to other types of trading.
It is the unexpected feature. The market of commodities is extremely heterogeneous. The reason is simple: behind the expression “commodities”, in reality, there is a very high quantity of assets, which for peculiar features can be considered independent asset classes.
This is also a positive element overall. Heterogeneousness, in fact, is synonym of diversification. Those who trade commodities, even ignoring any other kind of trading, would still have the opportunity to diversify effectively, enhancing their activity of investment and exercising a solid control on the risk factors.
Commodities as underlying
In the vast majority of cases, and always when it comes to speculative investment and trading, commodities are exchanged as underlying. For example, differently from what happens with the currencies and what could happen with the shares, when an individual trades commodities, they do not trade real commodities, but financial products that replicate their performances.
It is a physiologic dynamic, since currencies and shares are dematerialised goods, while commodities cannot be by nature. The best derivated product to trade commodities is the CFD (Contract For Difference).
The two macro-categories of commodities
The commodities have a special categorisation, which however respects a fact, a marked diversity between the assets of its category. In particular, a distinction is made between “hard” and “soft” commodities. Metals and energy belong to the first group.
The rest belongs to the second group, and in particular the food products. Each category, and even each subset, follows very particular dynamics and needs to be traded according to specific rules and methodologies. We will discuss this in depth in the next paragraph.
The types of commodities
Metals belong to the “hard” category. Moreover, they are the most traded commodities. They have two particular features. In first place, they are generally very expensive. Just think about gold (but also silver and copper are noticeable).
Secondly, among all commodities they are those that mostly follow the classic dynamics of trading, with particular reference to the currencies. Actually, in many cases they are connected to them by a relationship of interdependence, often in a negative sense (inverse proportion).
The reason for this is simple: precious metals are considered a store of value, to rely on when the market is going through a stage of financial turmoil.
To this category, or subcategory, belong the crude oil and natural gas. They are very appreciated assets because they combine great readability and discrete volatility. The energy are very readable since they are heavily influenced by geopolitical factors, which can be relatively easily interpreted, especially after gaining enough experience.
The flipside of the coin is given by the occurrence, not very frequent, of sudden international tension, which the trader might not be able to detect. In that case, the risks increase and the fluctuations of prices become very sharp double-edged swords.
This category includes cheap, “common” commodities, generally food. Among others, corn, wheat, rice, coffee and sugar are soft commodities.
Despite their apparent triviality, they offer important opportunities for profit. In first place, because they are the most volatile kind. Secondly, because they almost escape the most technical dynamics of trading. The two main factors are the normal exchange dynamics and, especially, the environmental factors. Also the various policies can affect them, especially if the economies are hetero directed.
Tips to trade with commodities
Trading with commodities is harder than commonly thought, also because they are less susceptible to the dynamics to which traders are used. Therefore, here are some tips to invest in commodities and generate profits.
Choose the broker carefully
The choice of the broker is always crucial, regardless of the kind of trading conducted and the asset classess on which one invests. Nevertheless, it is even more crucial when trading commodities. The reason is very simple, acting as underlying, and being able to be traded only through derived products, the policy of costs takes strategic importance. The reference is made to the commissions and (more rarely) the spreads.
Therefore, choose “tender” brokers from this point of view. Choose Key To Markets, which has made accessibility one of its strengths. All is then enhanced by a perfect trading environment, suitable for retail traders, and by a limitless offer (which also includes other asset classes).
Focus on few assets
We have made this clear: commodities allow for effective diversification, this is always a resource for the trader. However, the market of commodities is too complex to conduct a radical, extended and all-inclusive diversification. The complexity, obviously, does not come from the single dynamics of price, but on the great heterogeneousness of the sector. What to do then? The classic middle course is the best option.
Diversify, but at the same time specialise in a limited range of commodities. Obviously, choose carefully, in a perspective of diversification. This way you can reach the best result with the minimum effort, enhancing your trading and managing the risk effectively.
Develop a “salesperson” mentality
This can appear as a strange tip, also because it is valid especially for the “soft” commodities (when trading wheat, sugar, coffee, etc.). The trader should partially abandon the mentality of trader and take the mentality of a real salesperson, in other words an approach towards not the study of the graph, as much as towards the analysis of the external environment, the environmental factors, and why not, the political ones. They must be able to (rationally) sense the atmosphere so to orientate more effectively among the ever-present price fluctuations.
In addition, as already mentioned, the pure and simple technical analysis is not very effective when trading “soft” commodities. Obviously, do not abandon this tool, but simply contextualise it and accompany it with other types of analyses.