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.