Commodities are in fact the raw materials from which goods are produced, a real fundamental element of the global economy. For this, they are often used as excellent investment vehicles. Commodities are divided into two types, hard commodities and soft commodities.
What characteristics must a commodity have to be traded?
In commodity trading, liquidity is the primary thing that needs to be considered. This is because liquidity determines the ease with which it is possible to sell or buy a commodity.
A liquid market is generally associated with relatively low risk, as there will be someone willing to become the counterparty to a trading position. A good commodity will normally have a market of well-established buyers and sellers at any given time.
High liquidity also means that a commodity will have a lower risk of slippage. Slippage is the loss that occurs when there are large bid-offer spreads.
It is not unusual for commodities to experience low liquidity levels. Liquidity differentiates the most traded commodities from the rest of the fund. This leads us to ask an important question.
How are commodities traded?
Commodities are mainly traded in two ways: via futures or via contracts for difference (CFDs). The futures market traditionally is the most direct way to trade commodities.
Conversely, CFDs on commodities are a more modern and popular way to trade commodities. Unlike commodity futures trading which generally requires more capital, commodity CFDs offer high levels of leverage.
High leverage allows traders to gain significant exposure to the underlying commodity with only a small fraction of the required capital. In other words, it is possible to start trading with CFDs with significantly less capital than that otherwise required to trade futures.
The basics of raw materials
In addition to being able to be traded on margin, commodity CFDs offer traders the opportunity to make money in both bullish and bearish markets. In a bear market it is possible to go short (sell),which implies selling at a high price and then buying back when the price falls.
When you sell, you make a profit from the difference between the price at which you sell and the price at which you buy when the position is closed.
CFDs are complex products, but once you have studied the market it is possible to trade in a few steps.
Choose a reliable online commodity trading broker in India.
Choose a commodity market by choosing the type of commodities you want to trade.
Decide if you want to buy or sell based on your market analysis. If you believe that the price of a commodity will rise, you can choose to go long (buy), while if you think the price will drop, you can go short (sell).
Once you have decided the direction of your position, you will need to determine how many units of that commodity you want to buy or sell.
Define some risk management parameters. CFDs carry a high risk, so it is prudent to control trading risk with risk management tools.
Make a trade and track your location. Once you open a position you will need to constantly monitor it as the market can experience sudden changes in direction.
Regardless of which commodity you choose to trade, your trading doesn’t have to be arbitrary, it has to be based on a solid strategy and this strategy can be made with the help of top investment services companies in India.