How to start trading commodities

They should then use these charts as a guide to calculate worst-case scenarios. The advantage of CFDs is that trader can have exposure to commodity prices without having to purchase shares, ETFs, futures or options. Traders should examine long-term charts to assess the historical price ranges of individual commodities.

Evidence suggests that rice may have been the first commodity since the Chinese began trading it about 6, years ago. Buyers would place these tokens in sealed clay vessels and record the quantities , times and dates of the transactions on writing tablets. In exchange for the vessels, merchants would deliver goats to the buyers.

These transactions constituted a primitive form of commodity futures contracts. Other civilizations soon began using valuable such as pigs and seashells as forms of money to purchase commodities. Eventually, however, the ancient Greeks and Romans settled on gold and silver as the favored currencies for transacting business in commodities.

These civilizations prized gold and silver for their luster and physical beauty. In addition, since gold and silver are rare and can be melted, shaped and measured into coins of equal size, they logically evolved into monetary assets. Ultimately, exchanging gold for goods and services became the preferred means of commerce in the ancient world and led gold to become the first widely traded commodity.

In the United States, grain commodities first developed in the 19th century in response to the food needs of the nation. The latter part of the 20th century saw the commoditization of other agricultural products including livestock and the development of metals and energy commodities. Although the four categories contain dozens of traded commodities, the following generate the most liquidity trading in financial markets:.

The global coffee industry is enormous. In the United States alone, it accounts for more than 1. As a commodity, coffee is intriguing for at least two reasons. The overwhelming supply of the commodity derives from just five countries. At the same time, global demand for coffee continues to grow as emerging market economies develop a taste for the beverage.

Corn is a commodity with several important applications in the global economy. It is a food source for humans and livestock as well as a feedstock used in the production of ethanol fuel. The high cost of sugar in the United States has made corn a key ingredient in sweetening products such as ketchup, soft drinks and candies.

Growing food and fuel demand globally should drive continued interest in corn as a commodity. Sugar is not only a sweetener, but it also plays an important role in the production of ethanol fuel. Historically, governments across the world have intervened heavily in the sugar market. Subsidies and tariffs on imports often produce anomalies in prices and make sugar an interesting commodity to trade.

Although sugar cane is grown all over the world, the ten largest producing countries account for about three-quarters of all production. Soybeans play a critical role in the global food ecosystem. The oil from the crop is used in many products including bread, crackers, cakes, cookies and salad dressings, while the meal from crushed soybeans serves as the main source of food for livestock. Soybean oil also serves as a feedstock in the production of biofuels.

The growing need for food and fuel in emerging market economies could drive demand for soybeans. Wheat grows on six continents and for centuries has been one of the most important food crops in the world. Traders compare wheat prices to other grains such as corn, oats and barley. Since these commodities can be substituted for one another, changes in their relative prices can shift demand between them and other products such as soybeans.

Demand for cheap and nutritious food sources in developing nations should continue to drive interest in the wheat market. This commodity has the largest impact on the global economy. Not only is crude oil used in a variety of forms of transportation including cars, trains, jets and ships, it is also used in the production of plastics , synthetic textiles acrylic, nylon, spandex and polyester , fertilizers , computers , cosmetics and more.

If you take into account the input cost of transportation, crude oil plays a role in the production of virtually every commodity. Crude oil has different variations based on geography and physical characteristics: Natural gas is used in a variety of industrial, residential and commercial applications including electricity generation.

It is considered a clean fossil fuel source and has garnered increasing demand from more countries and economic sectors. The United States and Russia have emerged as the leading producers of this important global commodity. The main use of this refined crude oil product is as a source of fuel for cars, light-duty trucks and motorcycles.

Gasoline prices can have an enormous effect on the overall economy since demand for the commodity is generally inelastic. That is, consumers need to put gasoline in their vehicles to go to work, school and other essential activities. Many traders trade crack spreads , which are the differences between crude oil prices and the price of refined crude products such as gasoline.

Gold is a fascinating commodity because so much of the demand for it derives from speculators. Many market participants see gold as an alternative to paper money, so the price of the commodity often moves in opposite direction from the dollar. Gold is also used to make jewelry and electronics. It too receives significant demand from speculators as well as from jewelry and other industries.

Traders track the ratio between gold and silver prices since historically this relationship has been an indicator of the relative value between the two metals. Copper has so many industrial uses that it would be virtually impossible to build the infrastructure of a country without it.

Traders often refer to the commodity as Dr. They say the metal has a Ph. In fact, investing in copper is a way to express a bullish view on world GDP. The term cryptocurrency covers a broad variety of digital tokens that can serve a number of different purposes. A traditional cryptocurrency like Bitcoin is designed to act as a form of digital currency and a store of value.

Others like Ripple or Ethereum are designed fulfill a specific purpose and are targeted at specific niches. The vast majority of cryptocurrencies take advantage of blockchain technology. In their most simple form they use cryptography to process transactions and create new coins, this process is usually performed by computers solving complex equations and is called mining.

All processed transactions are stored on the blockchain which acts as a giant computerized ledger. This ledger can be shared simultaneously across thousands of computers and acts as an immutable record of all transactions that have ever taken place on the blockchain. This basic technology acts as the foundation for more advanced features such as smart contracts.

Cryptocurrencies are popular because their decentralized nature allows for enhanced security and privacy. Many users also believe that it helps to protect them from the interference of Governments and could help to break the monopoly on money currently enjoyed by the banking sector. Bitcoin is the most well known cryptocurrency but there are hundreds of different cryptocurrencies, known as altcoins.

These altcoins range from mere Bitcoin clones to currencies like Ripple or NEO built with specific utilities in mind. Cryptocurrencies are a unique sort of asset and defy easy classification. Many argue that cryptocurrencies and Bitcoin are currencies. The problem with this assessment is that it ignores the fact that centralization and government interference are one of the key features of a currency.

Governments and banks regularly manipulate their own currencies in order to maintain favourable market positions and would be unable to do this using Bitcoin. Some newer cryptocurrencies can be considered something closer to securities. A commodity is normally free from outside control, barring regulations, and their value is determined by market factors.

Commodities generally have three main purposes. They are either meant to be used, speculated upon or traded for goods. Indeed Bitcoin has become a bartering tool in Venezuela where the collapsing value of the Bolivar has led to people seeing Bitcoin as a safe haven. Given the sheer variety of cryptocurrency and the fact that most can be used in one of the three ways that a commodity can be used we believe that they are best classified as a commodity.

We have selected some of the most promising market leaders in the cryptocurrency world today and created detailed breakdowns of what they do, how they work and the way to invest in them. Each individual commodity has unique factors that drive its price. However, certain common factors play a role in determining prices for most commodities:. Fast-growing countries such as India and China are accumulating vast amounts of wealth as their economies grow.

As a result, they have a growing need for a variety of basic goods and raw materials such as crops and livestock to feed their people, metals to build the infrastructure in their cities and energy to fuel their factories, homes and farms. Demand from emerging markets has a huge impact on commodity prices. Signs of economic slowdown in these countries can depress prices, while surging economic growth can cause commodity prices to rise.

The relative scarcity or abundance of commodities can cause large movements in their prices. In the case of agricultural commodities, for example, the size of the annual crop yield can move market prices. Other factors that can affect supply include political , environmental or labor issues in major producing countries. For example, environmental regulations might lead to the closure of mines, and metal prices could rise in response to this supply shortfall.

Inventory levels could also impact the available supply of commodities. If major consumers of commodities build up inventory levels, then the market might see the increased supply as an overhang on prices. On the other hand, depletion of inventories could create the perception of a supply shortfall and cause prices to rise. When the value of the dollar drops against other currencies, it takes more dollars to purchase commodities than it does when the price is high.

Put another way, sellers of commodities get fewer dollars for their product when the dollar is strong and more dollars when the currency is weak. Factors such as weak employment or GDP numbers in the United States can weaken the dollar and lead to higher commodity prices, while strong economic numbers can weaken commodity prices.

The economic principle of substitution creates a risk of investing in any commodity. As prices for a particular commodity climb, buyers will seek cheaper substitutions, if available. For example, cheaper metals such as aluminum often substitute for copper in many industrial applications.

Similarly, farmers may substitute between corn, oats, wheat and barley as livestock feed based on price. Weather can play an important role in determining many commodity prices. In the agricultural sector, prolonged drought conditions or excessive rainfall can limit crop yields and cause prices to rise. In the energy sector, hurricanes, storms or extremely cold weather can curtail drilling or refining activity and create supply shortfalls.

Severe winter weather can create excessive demand for heating and cause big increases in prices of commodities such as natural gas and heating oil. Extremely warm weather, on the other hand, could raise demand for electricity needed to power air conditioning units. Increases in the world population and demographic shifts could create investment opportunities in all classes of commodities. The World Economic Forum estimates that the number of people living in cities could reach 6.

This trend should create enormous demand for metals as cities build their infrastructure. Not only will population increase, but people will be richer. The greatest gains in wealth will be in emerging market economies in Asia and Africa. These wealthier countries will demand agricultural products such as grains and livestock to feed their citizenry and cotton and wool to clothe them.

Population growth will also stoke demand for energy commodities. As people in the developing world migrate from rural areas into cities, demand for energy will rise. Urbanization and economic growth will also create new demand for fossil fuels to power cars, homes and businesses.

Investing in commodities one way to protect against inflation. Virtually all commodities could become more expensive if world economies experience bouts of inflation. At some point, this speculation could show up in commodity markets. A weak dollar, in particular, could create inflation and lead to higher commodity prices. Most traders have the vast majority of their assets in stocks and bonds.

Commodities provide traders with a way to diversify and reduce the overall risk of their portfolios. According to commodity historian, Bruce Babcock , the first formally recorded commodity futures trades probably occurred in 17th century Japan. Most historians agree, though, that the adoption of gold coins as a medium of exchange in medieval Europe played a key role in the development of commodity markets.

Regions throughout Europe began making their own specialized gold coins and trading with merchants returning from the East Indies and Asia. These developments led to the need for centralized exchanges. The first stock exchange formed in Belgium around , and by the early s, the Dutch, British and French governments began chartering companies to invest in voyages to the East Indies and Asia.

The goal of these trips was to bring back spices, silk and other treasures. However, the sailors faced risks including Barbary pirates, bad weather and poor navigation. To diversify their risks, traders would bet on several voyages at the same time.

A separate limited liability company financed each voyage, and together they formed the first commodity company investments. In the s , the burgeoning grain trade led to the establishment of commodities forward contract markets in the United States. Farmers in the Midwest would bring their crops to Chicago for storage prior to shipment to the East Coast.

However, during storage, the prices for these grains might change for a variety of reasons. The quality of the stored item could deteriorate, for example, or demand for the item could increase or decrease. To allow buyers and sellers to lock in transaction prices prior to delivery, the parties created forward contracts.

These contracts bound the seller to deliver an agreed-upon amount of the grain in question for an agreed-upon price at an agreed-upon date. In exchange for this obligation, the seller would receive payment upfront for the grains. These contracts are called forward contracts. They trade in the over-the-counter market , which means the contracts are privately negotiated between two parties.

The buyer faces the risk that the seller might default on the contract and fail to deliver the asset. As more farmers began delivering their grains to the warehouses in Chicago, buyers and sellers realized that customized forward contracts were cumbersome and inefficient. You can do a lot of research, feel confident in your prediction and still lose a lot of money very quickly.

Check out our list of the best brokers for stock trading instead. TradeStation and Generic Trade do a good job of serving two different types of futures traders. In the sections below, we highlight the standout firms in various categories. Each excels in different ways: TradeStation is a strong choice for seasoned tech-savvy futures traders.

Futures trading can become costly quickly. Investors can be subject to platform fees, data-feed fees, minimum-activity fees and fees to access premium reports and other research. When companies cut costs for one service they often make up the difference elsewhere, typically by charging platform and data fees. Both brokers have tiered commission schedules based on monthly volume.

Lightspeed customers also have free access to its WebTrader platform where Level 1 quotes are free, and can also pay a monthly subscription fee for other professional-grade platforms. These brokers offer the highest level of real-time data and quotes, charting and screening tools, technical indicators and a wealth of free research.

Interactive Brokers ably serves both retail and professional clients with three trading platforms, including its Trader Workstation, Web Trader and desktop options. The broker also offers a full-featured mobile app. Traders who want the most leverage will appreciate the low day-trade margins at these brokers.

Futures contracts are highly leveraged: That sounds like a good thing, and it is. But it also adds to the risk: Leverage can lead to bigger gains and bigger losses, and if your account dips below the maintenance-margin requirement, your broker may issue a margin call that requires you to add funds immediately.

That means you need money available above and beyond any positions you hold. But futures contracts are often bought and sold within the same day, and some brokers offer a reduced margin requirement for day trades; generally a percentage of the initial margin requirement. These brokers offer phone support around the clock when futures markets are open, in addition to online educational resources.

But even experienced traders need assistance: It can take time to adjust to a new trading platform, and many of the best ones are so advanced that even the most-active traders could use a road map. Look for hour service from Sunday afternoon through Friday evening.

A brand new collection of high-profit commodity trading techniques and insights All the knowledge you need to start earning consistent profits in commodities. Targeted effort on commodity trading transparency The auction start price is set with reference to Brent oil prices through a formula that considers quality of oil. Before getting into the nitty gritty of what you need to know when you start trading, Whether you go on to trade stocks, bonds, currencies or commodities, it is.

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