Commodity Trading As A Business: How It Works

More and more people are interested in trading in raw materials. On the one hand, this is due to the fact that there are already numerous forex brokers who also appeal to investors with little capital. On the other hand, commodity traders can also make extremely high profits. Wheat and other foods are mainly traded actively; building materials such as iron or copper are also extremely popular retail objects.

In raw materials trading, a distinction is made primarily between products that are harvested or that have to be extracted from the ground. Products that are harvested are called “soft commodities” (agricultural products). Products that need to be promoted are hard commodities. The best-known agricultural products include cocoa, sugar, coffee, corn, soybeans or wheat;

Commodity traders speculate with high profits

Beginners should mainly focus on hard raw materials. This is because the markets for agricultural commodities are dependent on the actions of the larger food manufacturers. This allows for unpredictable market movements that are difficult for beginners to assess. However, this does not mean that hard raw materials can be assessed more easily – as a rule, experience plays an important role. The fact is that the raw material markets are subject to strong fluctuations – this makes the raw materials particularly attractive for investors who like to make risky decisions. Ultimately, high fluctuations are possible due to the fluctuations, but commodity traders must also be aware that high losses are also possible.

What factors influence commodity trading?

Commodity trading – like almost every other market – is dominated by supply and demand. It is a principle that actually works quite well. It gets complex when the commodity trader deals with futures contracts. These are agreements that stipulate the delivery of raw material at a specific point in time.

However, due to the fact that prices for agricultural products and hard raw materials develop cyclically, the raw material trader must take into account that he correctly estimates the price cycles. If the supply is low, the price of the raw material will go up; however, if demand is low, the price drops. Of course, external factors also have an impact on agricultural commodities. Even weather-related problems, which can occur again and again – completely surprising and unforeseen – can subsequently drive up prices.

However, prices can also drop if larger reserves of hard raw materials have been built up. Even macro-economic trends have an impact on raw material prices. If the international economies (within the Eurozone, China, or the USA) are stable, the demand for energy and raw materials remains. Gold is an exception. The price rises when the political or global economic situation is extremely uncertain. It should be noted that many raw materials – including oil or gold – are traded in US dollars. If a currency sinks against the US dollar, a relative price increase can be observed. Thus, commodity traders must also take currency risk into account.

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Commodity Trading Strategies

Trading in commodities is not the same as trading in stocks or currency pairs. Therefore, before starting, each trader should closely explore the market and take into account all the factors that may affect the prices of selected products. IFC Markets offers its clients various ways to trade commodities, such as trading continuous CFDs on commodities, CDFs on commodity futures. In any case, a trader must develop and adhere to a certain trading strategy to be successful. Remember that you must master the strategy you choose, which means that losses can occur at first, but that will help you improve your technique and not lose in the future.

We made a list of some commodity trading strategies that you can follow and choose the most suitable one.

  • Go with the trend. One of the most proven and effective ways to trade is to follow the trend. This strategy works extremely well in the commodity market.
  • Seasonal trade. Commodities are materials, and in common use in our daily lives, most of them are cultivated (agricultural products, for example, corn, soybeans, lean pork, live cattle, cotton, etc.). Therefore, they are subject to seasonal influences. If a merchant understands the seasonal patterns of products traded, they will know better when to go long or short.
  • Scalping. The scalping strategy allows a trader to make smaller profits from insignificant price movements. When the reseller makes a very small profit per offer but increasing the number of successful offers to 50-100 or more actually increases the total profit.
  • Focusing on supply and demand. As is known, the commodity market is driven by the balance of the supply/demand relationship. If for some reason (disaster, drought, war, disease, global political changes, etc.), the supply decreases, it means increasing prices. And vice versa, when the supply of a certain product increases and the demand falls, prices will fall. Following all of these events and factors allows the merchant to buy and sell products more wisely and make a profit, not a loss.

Beginners should look into the demo account first

Commodity trading is extremely exciting – even small investors are increasingly interested in trading in commodities. Through so-called forex brokers, even small investors who only want to invest very small sums can easily trade in raw materials. If you are still unsure, you should choose a broker that provides a free demo account. This way, the beginner can familiarize himself with the platform and try out his strategies. In addition, the different Forex brokers should be compared – the fees that arise in the course of trading have a huge impact on the possible profits.