Are you interested in commodity trading but don’t know where to start?

Whether it’s energy commodities, like crude oil or gas, or metals, like gold or silver, commodity trading is a way to diversify your trade portfolio and gain access to new markets. 

But it’s not without its risks: as with any trading venture, there are both upsides and downsides.

In this guide, we’ll take you through the basics, explain the essential strategies, and give the key steps you need to start. By the end, you will know how to approach the dynamic world of commodity trading with caution, so you can make the right decisions.

1. What Is Commodity Trading

Firstly, it is good to have a clear idea of what commodity trading means. 

This is the activity where you buy and sell raw materials or agricultural products. Commodities can be divided into two main types:

– Hard Commodities: Resources like gold, oil, and natural gas that are mined or extracted from the ground.

– Soft Commodities: These include agricultural products like wheat, coffee, and corn.

 Commodity trading involves taking advantage of price trends caused by fluctuations in supply and demand, geopolitical events, and economic trends.

Because commodities can experience wide price swings based on these factors, trading them can yield massive gains and similarly large losses.

2. How Does Commodity Trading Work?

There are two main ways to engage in commodity trading:

• This involves buying and selling commodities for immediate delivery. It’s simple but unusual – more typical in a tangible market than one dealing in currencies such as retail trading could do.  

 – Futures Trading: This is the most popular method for individual traders. A futures contract (similar to an option) gives you the ability to purchase a commodity at a given price on a future date.

So, you can use futures to hedge against a price change in the underlying commodity or to speculate about a future price change. 

Futures trading is risky, however, because prices can shift dramatically and quickly. 

So, keep in mind the dangers and take only as much risk as is appropriate to your tolerance for risk and reward. 

Traders can now enjoy access to a diverse range of commodity futures through exchanges like Finxo Capital – from precious metals to energy products. But with futures trading comes high volatility and risk, so it’s necessary to adopt sound risk management approaches. 

3. Why Trade Commodities?

 There are advantages to commodity trading; however, one must also consider the risks involved.

 – Diversification: Commodities help to diversify a portfolio because their prices often move in different directions from those of traditional trades such as stocks and bonds – but they also add another layer of risk.  

 – Hedge Against Inflation: Some commodities (such as gold and oil) do well in times of inflation, so trade in them provides some protection against higher prices. While this is true, commodities can also decline in price during times of economic stability.

 – Liquidity: Most commodities, such as crude oil and gold are highly liquid, meaning that traders can enter and exit their positions in and out of the commodity markets fairly easily.

Markets do differ, however, and traders of niche agricultural products can sometimes find it difficult to get an acceptable price for their cocoa or coffee.

For instance, in response to fears regarding market volatility during the COVID-19 pandemic, the price of gold spiked.

This represented the ‘up’ part of the trading opportunity; those who entered too late also risked catching the ‘down’ as prices plateaued.

4. Steps to Start Commodity Trading

Ready to begin commodity trading? Here are the steps to get started:

Step 1: Choose a Reliable Trading Platform  

The next ingredient is the platform you pick; in financial markets, you want to go for a platform with low fees, lots of tradable commodities, and an easy-to-use interface. 

Finxo Capital is a good option, as it considers both novice and expert traders, it has educational and demo materials and access to advanced tools, but you have to make sure the risk-management features are up to par.

Step 2: Learn the Basics of Commodities  

You actually have to know how commodities work to understand why they can spike and cause inflation. Take oil, for instance.

That’s a commodity in which geopolitics can certainly affect the price.

If there’s a hurricane in the Gulf of Mexico, that’s going to mess up oil. Sometimes there are disruptions along the supply chain – the pipelines, the shipping, all of that – that can translate into higher oil prices.

Same thing if there’s good weather and a very high agricultural yield.

Step 3: Open a Trading Account  

 After choosing a platform, you need to open an account, which involves filling out an online form and verifying your identity. If you trade via Finxo Capital, you’ll be up and running in no time at all.

Step 4: Choose Your First Commodity  

As a beginner, you are usually advised to go for one or two commodities, perhaps gold and oil: these are the most liquid, and their prices are relatively transparent. As you become more experienced, you might look at extending your portfolio to include other commodities, such as natural gas or agricultural products. 

Remember that the benefit of more diversification can come with new types of risk.

Step 5: Place Your First Trade  

Now that you have chosen your commodity, it is time to place your trade. You can use Finxo Capital to do that. This platform provides access to both spot trading and futures contracts. For futures contracts, you are speculating on the price direction in the future, a feature that might be riskier from the spot trade as you could have a huge price swing in a dreadful second.

5. Popular Commodities for Beginners

 If this is your first time trying your hand at commodity trading, the following commodities are most commonly traded because of their liquidity and availability:

 – Gold: Gold is said to ‘not make money’ but to be a hedge against market volatility; prices may also fluctuate like they did during the recent recovery.  

 – Crude Oil: perhaps the most widely traded commodity, it is heavily influenced by geopolitics and global demand, so its value can be good – but it can also be very volatile, with fast price movements that could easily wipe dealers out if they were caught unprepared.

 – Natural Gas: High volatility and a plentiful supply of the necessary funds make natural gas a viable trade. Successful natural gas trading relies on one’s ability to proficiently engage with its inherently volatile market. This volatility could spell substantial losses for unadvised traders.

 – Coffee: this ‘green gold’ is one of the world’s leading on weather conditions, worldwide demand, and crop yields. It provides diversification from metals and energy but is also subject to seasonal volatility.

Best Trading Practices and Risks Involved

 Commodity trading is ‘sticky’, which means that it can be lucrative, but only if you stick to certain key best practices. These include:

 – Research and current affairs: Keep up to speed with world news and economic data, such as GDP figures, and tailor it to your commodities by reading any specialist media. Many commodities, such as crude oil and wheat, are price-sensitive to geopolitical events, weather, and trade policy, which can mean rapid swings in prices.

 – Start Small: Beginners should start with very small trades to avoid being wiped out. It might be tempting to trade a big size initially, but experience is the best teacher, and it’s best to avoid getting rocked on your first trade.

 – Risk Management: Use stop-loss orders always. Commodities are highly volatile, and without having proper risk management in place, price movements can quickly lead to huge losses. Stop loss orders and protect your position by automatically closing a trade if the price moves against you.

 – Diversify: Spread your trades over a wider array of commodities so that your portfolio isn’t overly exposed to one sector. For example, by combining gold with agricultural commodities such as corn and wheat, you balance risk and reward.

Why Trade with Finxo Capital?

Finxo Capital offers several advantages for beginners and seasoned traders alike:

 – User-Friendly Interface: The Finxo Capital platform is optimized for traders of all skill levels, with advanced tools available to those who require them.  

 Wide Range of Commodities: We offer a vast range of commodities, including precious metals, energy, and agricultural products.

   – Risk Management Tools: stop-loss orders and trailing stops can help commodities traders protect their trades , and Finxo Capital has features that assist with managing the inherent risk of commodity trading.

 However, buy-and-sell commodity trading on any platform should be done with care as the risks of loss can be severe. 

6. Real-World Example of Commodity Trading

Once again, using the 2020 oil price crash as an example of how commodity trading plays out in practice, as COVID-19 was hitting in the first quarter of 2020, oil prices collapsed as the world economy ground to a halt and oil demand plummeted simultaneously. 

Traders who anticipated this happening by shorting oil futures contracts were able to gain from the price fall, the oil futures and unable to manage their risk were substantially ruined.

Later that year, as the recovery in demand continued and oil production dipped, prices began to climb once more. 

Traders who jumped into the market at the low and managed their positions correctly might have seen their trades grow. But if they left themselves exposed to that volatility, they might just as easily have been wiped out again. 

7. Risks Involved in Commodity Trading

While commodity trading offers many opportunities, it’s crucial to understand the risks involved:

 – Price Volatility: Commodities are subject to volatile price movements in response to global events, natural disasters, or market demand shifts (for example, a natural disaster affecting oil production can cause an instantaneous price spike).   

 – Leverage Risk: Almost all platforms, including Finxo Capital which we are partnered with, allow traders to trade using leverage. Leverage allows traders to trade with a large amount of money using a small amount of money. 

However, leverage has its disadvantages, especially losing your money when you trade using leverage. 

As a beginner, you have to limit the leverage that you use so as not to lose all your money.

 – Liquidity Risk: Some commodities might be less liquid, meaning that it can be difficult to buy or sell them at a price of your choosing. Some agricultural commodities, for example, can be less liquid during the off-season or in times of low demand.

Rather than seeking out a quick return, traders can also minimize much of this risk using small stop-loss orders and, importantly, keeping realistic trade sizes –kicking one’s trading up a notch. 

With this guide, you are ready to begin your commodity trading journey. Armed with the strategies and tips shared here and the tools offered by Finxo Capital, you will be able to approach the markets with confidence and mitigate your risk.