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Simplifying the commodity market for beginners
What are commodities?
Commodities are raw materials and natural resources that play a crucial role in our daily lives, from the coffee we drink to the metals used in our devices. The commodities market has been an integral part of global trade for centuries, with its roots tracing back to ancient trade routes like the Silk Road. Today, commodities trading remains a significant component of the global economy, driven by the fundamental principle of supply and demand.
Types of commodities
Commodities are broadly categorised into two main types: hard commodities and soft commodities. Examples of hard and soft commodities can be found in the table below:
The value of commodities is influenced by various factors, including supply and demand, natural events, and global economic conditions.
Among the most popular commodities are oil and gold. Oil, particularly West Texas International (WTI) and Brent oil is highly liquid and in constant global demand. Gold, historically considered a store of value, remains a favorite among traders, especially during economic uncertainties.
Understanding commodities trading: Boosting your trading skills
Below are some approaches traders often use to deepen their understanding of the commodities market:
- Understand price-affecting factors:
Commodity prices are influenced by economic conditions, political events, and natural disasters. For instance, economic downturns can decrease demand, while geopolitical tensions or natural calamities can disrupt supply chains, leading to price volatility.
- Conduct in-depth market analysis:
Use both fundamental and technical analysis to make informed trading decisions. Fundamental analysis evaluates the intrinsic value of an asset considering external factors, while technical analysis uses historical price data to predict future movements.
- Leverage market trends:
Recognise and utilise market trends, whether short-term or long-term. Uptrends indicate rising prices, while downtrends show declining prices. Trading in the direction of the trend can potentially increase the chances of profitable trades.
How to trade commodities at Deriv
Commodities trading can be conducted through futures contracts on exchanges or via more accessible instruments like CFDs (Contracts for Difference) and options. At Deriv, traders can trade both CFDs and options on commodities, allowing them to speculate on price movements without owning the underlying asset. Here’s a closer look at the offerings:
CFD commodities trading:
You can trade commodities with CFDs on Deriv MT5, Deriv cTrader, and Deriv X. One of the main advantages of trading commodities with CFDs is the flexibility to keep your position open for as long as you choose. Your profit or loss, however, is only realised when you close the position. When trading CFDs, you can speculate by:
- Going long (buy) if you anticipate a price increase.
- Go shorting (sell) if you expect a price decrease.
This flexibility allows you to adjust your trading strategy based on market conditions, giving you control over the timing of your trades.
Options commodities trading:
At Deriv, you can trade digital options on metals using rise/fall, higher/lower, and touch/no touch trade types. Digital options are a type of financial contract that allows you to predict one of two possible outcomes. If your prediction is correct, you receive a fixed payout; if incorrect, your loss is limited to the initial stake placed at the start of the trade. You can trade digital options on the DTrader, DBot, and SmartTrader platforms. Here’s a closer look at these contract types:
- Rise/Fall lets you predict whether the exit spot will be higher or lower than the entry spot at the end of the contract period.
- Higher/Lower lets you predict if the exit spot will be higher or lower than a target price (the barrier) at the end of the contract period.
- Touch/No Touch: Predict whether the market will reach or miss a target price at any time during the contract period.
A key benefit of options trading is that you set the trade duration upfront, and your potential profit or loss is known when the position is opened. While CFDs offer open-ended positions with flexibility, options provide structured risk and reward, offering more certainty from the outset.
Start trading commodities today!
Commodities trading offers unique opportunities due to its volatility and connection to real-world events. By understanding the market dynamics, conducting thorough analysis, and leveraging various trading strategies, traders can potentially enhance their skills and navigate the complexities of the commodities market. However, it's crucial to remember that all trading carries risk, and continuous learning and adaptation are key to long-term success in this dynamic market.
Open a free demo account on Deriv and practice trading commodities with $10K virtual money.
Disclaimer:
Trading is risky. Past performance is not indicative of future results. It is recommended to do your own research prior to making any trading decisions.
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