CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The standard deviation of year-on-year growth of commodity terms of trade (CToT) stayed near the 1% level between 1981 and 2019. It rose to 1.85% during 2020-2021. CToT measures the volatility of the commodities market. In 2022, geopolitical tensions, banking crises and supply-chain disruptions drove commodity prices, inducing volatility. Although previously, most commodity price surges were accompanied by fiscal expansions, this time, it came with a slowdown in growth and amplified swings in inflation rates globally.
Change In Price of Different Commodities from January 2022 to June 2022
Source: https://www.statista.com/statistics/1298241/commodity-price-growth-due-to-russia-ukraine-war/
Higher volatility and a unique global economic atmosphere are attracting traders to capitalise on the volatility-induced opportunities in the commodities market. Are you ready to speculate on commodity price fluctuations? Here’s a guide to help you get started.
Commodities are broadly classified as hard and soft.
Traders prefer to classify commodities based on their behaviour under various market conditions.
Metals are used in multiple industries. Precious metals, such as gold and silver, witness distinct trading conditions and opportunities. Metals used extensively in industries, like copper and iron, move differently.
Crude oil and natural gas see worldwide demand. But being non-renewable sources of energy, their market is affected either by their refining capacity or the availability and usability of alternate sources of energy.
Crops such as sugar, cotton and wheat, or products derived from livestock, such as dairy and silk, are included in this category. Crops are further classified as food, non-food, or industrial, such as cotton.
For traders adept at fundamental analysis and updated on international events, commodity trading can be effective even with little technical analysis.
Commodities generally follow a cyclic pattern, with their prices soaring and declining through the year. However, it is important to understand what drives these cycles to speculate on price movements effectively. This helps build an efficient trading plan. The top reasons for price movements of commodities include:
The commodity supply depends on the amount of produce, the geopolitical backdrop and the weather (for agricultural products). The oil supply, for instance, is controlled by the OPEC, which attempts to minimise major swings in oil prices while ensuring profitability for member oil-producing nations. Agricultural production is affected by suitable or poor weather conditions and natural calamities.
The demand for goods is often dictated by industrial demand or the global economy’s health. For instance, energy demands soar during winter, while gold demand picks up due to inflation or recessionary fears. Metals such as gallium and germanium saw higher demand in 2023, since China, the largest producer, banned supply to the US, the largest importer and user of these metals, especially in the AI-dominant tech industry.
The supply chain is a critical element in commodity trade. The inter-dependence of nations for different kinds of produce requires disruption-free trade. For instance, the sanctions on Russia imposed in 2022 resulted in high energy prices across the Eurozone, especially in Italy. This was due to the heavy dependence of the EU block on Russian supply.
Since the greenback is the global reserve currency, its price impacts every financial instrument. When the dollar strengthens, commodities become costlier to purchase for other nations. When nations start using their reserves, commodity prices fall due to a loss in demand.
Utilising tangible assets, traders can gain exposure to commodities through various means, such as trading gold bullion, shares of companies active in the commodities segment, or via futures or CFDs.
CFD trading is one of the most popular techniques because:
The below steps can help you build your commodity trading strategy.
Identify the commodities you want to trade. Consider your existing portfolio and choose a commodity that works best to hedge the risks of your existing portfolio.
Learn how the commodity of your choice moves. Understand the fundamental and technical indicators that can help you speculate on the price movements of your chosen commodity.
Choose the indicators that can help you identify trading opportunities and make informed decisions for your commodity of choice. Choose from trend trading, news trading, price trading, or breakout trading strategies, based on your chosen instrument and commodities.
Open a demo account and practice trading the commodity, technical and fundamental analysis, and risk management techniques such as stop loss and take profit. Track your trades to refine your trading plan according to your trading goals.
Fund your live account and start trading.
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