How to start trading commodities online
Trading commodity markets online allows the retail trader to take advantage of price fluctuations in a range of markets representing goods that are used every day by people around the world. Commodities trading using a contract for difference (CFD) market gives traders the ability to make money based upon the underlying asset, without actually having to go into the futures market.
Because of this, traders can get in and out of the market without much hassle. The ability to trade a much smaller than usual position that you can in the futures market is also great for retail traders because it can keep your risk somewhat granular, allowing the trader to trade as much or as little as makes sense. You are not limited by a standardized size.
Choose a broker and market
Choosing a broker is important, as they will give you access to the market itself. Make sure that they are regulated, and of course, offer the instruments that you are interested in. Beyond that, you may wish to look at spreads, which is the difference between the bid and ask price of a market. Furthermore, you need to make sure that they offer any value-added benefits that you are looking for such as education or analysis.
Some of the most common markets are going to be oil and gold. However, there are plenty of other markets that you can get involved in such as natural gas, sugar, coffee, wheat, corn, and precious metals. Some markets are a bit more volatile and easier to trade than others, but if you research the market that you are interested in, one of the huge advantages of commodities is that they tend to follow supply and demand dynamics quite significantly.
Your initial moves
There is a whole list of things that you should probably try to accomplish right away, not the least of which of course will be familiarizing yourself with the trading platform that the broker offers. Because of this, you must start with the demo account, which is also known as “paper trading.” This is when you are trading a simulated account, getting used to the platform, and not risking any real money.
You should learn about the fundamentals of whatever market you are trading, and what the demand for a particular commodity is. For example, if the world’s economy is running strong, that typically means there is significant energy demand. The exact opposite is true of course. Commodities tend to respect fundamentals much more significantly than many other markets.
You should also build some type of trading system. Generally, it is going to be a mix of both fundamental factors and technical analysis. Technical analysis is the ability to find supply and demand on a price chart, using both a mix of price structure and certain indicators.
Finally, you need to take that trading system that you are working with and do what is known as a “backtest”. This is when you see how this particular trading system performs in historical markets. If you know that it makes money over time, it is much easier to take advantage of your system. Alternately, if it does not make money, then you know to move on and find something else.
Not only should you look into your system and tools available, but you also need to take advantage of the fact that the CFD market allows you to trade very small increments. Make sure that once you make the move from a demo account to a live account, you should take your time to get used to the idea of real money. Remember, the markets have been around for quite some time, and they will be there whenever you are ready both systematically and psychologically.