Commodities are a raw material that can be purchased and sold. They can be petroleum, agriculture, metals, or any hard asset where the product is fungible and can be used in any location around the globe. Commodities are often traded by brokers and usually have robust liquidity. Here are ten things you should know about commodity trading.
Commodities are Generally Priced in Dollars
Most commodities are quoted in US dollars. This means that if you want the value of a commodity in another currency, you need to convert the value by using a currency exchange rate. When the value of the dollar rises, it makes the price of a commodity more expensive in other currencies.
Some Commodities are priced in Currencies Other than the Greenback
Some oil commodities are priced in currencies other than the US dollar. Before you trade a commodity, make sure you know which currency it’s quoted in.
Commodities are Fungible
Most commodities that have the same value can be delivered at any location around the globe. For example, gold that is 99.99% pure will likely be accepted as pure gold at any vault around the world.
Commodities Have Their Own Fundamentals
Supply and demand are the driving forces behind the movements in commodity prices. When demand outstrips supply, the price of a commodity generally rises. When the reverse is true, and supply outweighs demand, the price generally falls.
Supply and Demand Figures are Readily Available
You can find supply and demand figures in numerous locations. For example, the US Department of Energy puts out weekly inventory figures that can be used to trade the petroleum markets. They also release weekly natural gas figures. The US Department of Agriculture releases monthly data on corn, soybeans and wheat.
Geopolitical Events Can Drive Commodity Prices
Several commodities such as oil and coffee are produced in areas where there can be geopolitical unrest. This can generate supply disruptions which can generate significant price volatility. For example, many of the members of the OPEC oil cartel, have unstable governments. This can cause prices to surge when unrest occurs.
You can Use Technical Analysis to Trade Commodities
Past price action can be a guide to future commodity price action. Since commodity prices experience volatility, the use of technical analysis, which is the study of past price movements, can help you determine the future price of a commodity.
Commodities are actively traded by Brokers
Most CFD brokers offer a suite of commodity trading products. You will likely find petroleum products such as oil and gasoline, as well as agricultural products like corn, soybean and wheat. Most brokers will also offer precious metal such as gold and silver, along with base metals such as copper and aluminum.
You can Trade Commodities against One Another
There are several strategies that you can use to trade commodities including pair trading. For example, you can trade gold versus silver or corn versus soybeans, trading these pairs as a market neutral strategy while using relative value.
Commodities Can be Volatile
Commodity trading can be volatile. Since commodities can experience sharp moves due to weather or supply disruptions, the price can whipsaw. Make sure you track the movements before you begin to risk your capital.