Gren Invest: Unlocking the World of Commodities Trading
Commodities are the basic elements that make us all go – they are any raw or partly processed material subject to trade, including everything from livestock and foodstuffs (agricultural products like wheat and corn) to fuels such as oil and gas. Whether it’s the energy (crude oil, natural gas) that fuels our homes, the precious metals (gold, silver) that have traditionally acted as safe-haven assets or the agricultural goods (wheat, coffee) that feed a global population – these are all tangible goods on the go. Investing in these critical assets presents a laser like focus on the fundamental drivers of economic growth. This commodities market is a place where the price of goods is subject to an intricate interplay between global supply and demand, geopolitical events, weather conditions and innovation. For traders, such volatility means a plenty of opportunity. To understand these markets is to win insight in everything from the influence of a drought on grain prices to how political instability can impede oil supply chains.
Participating in the commodities market offers tremendous opportunities for diversification of portfolios. Commodities, as opposed to financial assets like stocks and bonds, tend to react to a variety of economic drivers and thus act as a potential inflation hedge or counterweight against market pullbacks. In times of economic uncertainty, for instance, people can rush into gold, pushing its price up while stock markets stumble. There are many ways to gain access to these markets, ranging from trading futures contracts and options on the most popular exchanges, to investing in commodity-focused Exchange-Traded Funds (ETFs). Futures contracts, for example, allow traders to bet on the future price of a commodity without having ever even seen the product itself, and so provide leverage as well as liquidity. ETFs afford an easier entry, where investors can hold interests in a basket of commodities or commodity producers using the same trading account as for stocks. At Gren Invest, we are dedicated to presenting the information and research that is required to follow in the path of this fabulous global financial stream.
You won't be able to win in this field without using a combination of analysis, planning and execution. Traders have to learn to read an array of information, from agricultural reports and energy inventories to macroeconomic data and political news. Whether you’re concentrating on a single commodity or trading across commodities like energies, metals and agriculture the same fundamental rules apply. Developing a sound trading plan which incorporates set goals, risk tolerance and an in depth comprehension of market dynamics is essential. It requires you to never stop learning, adjusting to market changes that since by their nature are constantly changing and having the patience to see a sound well researched strategy play out. By understanding the key influences driving these two areas (and patterns in charts) you can ready yourself to profit from the price movements of those raw materials that make up our world and turn broad global trends into specific trade opportunities, building a robust portfolio along the way.
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Top Questions Answered
Commodities are generally split into two main categories: hard and soft commodities. Hard commodities are raw materials that can be extracted from the earth. This category is dominated by energy products such as crude oil and natural gas, and metals. The metals groups is further subcategorized into precious metals, including gold, silver and platinum (which are sometimes considered safe havens), and industrial metals like copper, aluminum and zinc which are essential to building and manufacturing. Soft commodities are chiefly products that are sown or raised. That wide array includes grains like wheat, corn and soybeans; livestock such as cattle and hogs; and other crops like coffee, sugar and cotton.
The price of commodities is dictated by the law of supply and demand. When worldwide demand for a raw material exceeds what is available, prices tend to surge. On the other hand, overabundance or slackened demand will normally drive prices down. All sorts of combinations affect this balance. Even without the recent announcement rattling the market, there are many other factors that can impact supply including weather patterns affecting harvests, geopolitical turmoil interrupting extraction and transportation and technological improvements in production. And demand is usually related to the health of the global economy, industrial production rates, consumer practices and government policies. For example, rapid economic growth in one country, such as China can increase demand for industrial metals and lead to higher energy prices may also result from global recession.
The distinguishing feature is whether the good or service is delivered and paid for immediately. Spot trade is the of a quality at one time and place for delivery at another time and place. The cost is based on the market situation at that time. This is typical for industrial consumers, who want the raw article for their manufacturing processes. Futures trading, on the other hand, consists of contracts with standardized terms for the purchase or sale of a specified amount and quality of a commodity as well as at an agreed upon price at a future date. They are traded on exchanges and are employed by commercial hedgers to lock in prices, as well as speculators trying to profit from price swings without ever needing to own either end of the deal.
Commodity markets are heavily influenced by geopolitics, which can be a major source of price volatility. Key producing regions may experience political turmoil, hostilities or related problems that adversely affect the supply of commodities. For example, instability in the Middle East can disrupt crude oil production and shipping lanes, pushing worldwide energy prices up. In the same vein, trade tariffs or sanctions levied by one nation toward another can disrupt patterns of global trade and result in market price differences for items such as soybeans or aluminum. Due to these hazards, traders must pay close attention to international relationship because a single political occurrence can have immediate and widespread implications throughout many commodities categories, offering significant risk and trading opportunities.
There are a few easy ways for beginners to get started on trading commodities. One of the most popular ways is through commodity ETFs. Investors buy and sell these funds like stocks, which can follow the price of a single commodity (such as gold or oil) or a broad basket of them, providing instant diversification. You might also consider trading Contracts for Difference (CFDs), where you’ll be speculating on the price movement of commodities without taking physical ownership. For those interested in trading more complex securities, including options or futures, here’s what The Balance has already written on the subject.Checking and savings accountsThe most basic way to get started is by following this advice: open up a brokerage account (not just any old HYP ), sell some of your shares and buy one with an execution date in the future. No matter which path is chosen, novice traders should begin by investing in comprehensive education, formulating a well-considered trading plan and perhaps testing the waters through a so-called demo account before tapping into real funds.
A futures contract is a legal agreement to purchase or sell a commodity or a financial instrument at an agreed upon price at a specified time in the future. They are quantity, quality and delivery date standardized by exchanges such as the Chicago Mercantile Exchange (CME). Futures were originally developed to enable producers and consumers to protect themselves from price risk so a farmer could lock in the price at which he would sell his crop before it was harvested, for example. They are now commonly employed by speculators seeking to profit from fluctuating prices, but who have no desire to make or take delivery of the actual commodity.
Because commodities are so volatile, diversification is a fundamental risk mitigation method in trading them. Varies by commodity Even if a trade war puts the squeeze on pricing, the different commodities are affected by other forces: A drought would clobber agriculture commodities but largely have no effect on gold or oil prices. A trader can reduce the effect of an adverse event on a single commodity by investing in a range of sectors (energy, metals and farm products). If one portion of the portfolio falters, gains in another region can balance out those losses. This mitigates the lumpiness of returns and shields the entire portfolio from surprising shocks that can come in the form of unusually warm or cold weather, geopolitical events, or select industry pullbacks.
The main risk with trading commodities is that of price fluctuation. Prices can gyrate wildly because of reasons like supply chain disruptions, geopolitical volatility, unforeseen weather and changes in the health of the global economy. This kind of volatility can easily produce both disastrous and profitable results, particularly for those that are trading with leverage. Another important consideration is the risk of illiquidity, which exists in less-frequently traded markets or trades where it may be hard to enter or exit a position at an appetizing price. Third, there is the counterparty risk in over-the-counter trades and the fact that governments – and particularly those of countries which are home to a significant portion of global production can at short notice crash a commodity’s market fundamentals (through tariffs or export bans), wiping out a trader’s position without prior warning.
Hedging is a risk management strategy that serves to mitigate or balance the risk of unfavorable price fluctuations in a commodity. It is heavily relied upon by those who trade or consume physical commodities. For instance, an airline could purchase futures contracts in crude oil to guarantee a future price for jet fuel and insulate itself from potential price hikes that would increase its operating costs. On the other hand, a coffee plantation would sell coffee futures to lock in a price for its next harvest, thereby safeguarding against any lowering of prices. These traders are able to hedge against uncertainty and ensure the stability of their revenue or costs by adopting a position in the futures market opposite to what they take in the spot market.
A 'safe-haven' commodity is a type of asset that is likely to either maintain or increase its value during market turbulence and economic downturns. It is the best known of the safe-haven commodities. Investors lose faith in stocks, bonds or currencies, often as a result of something big a financial crisis, recession or major geopolitical conflict and they seek out gold as a reliable repository of value. This “flight to quality” happens because gold is a tangible asset, not linked to any one government’s fiscal or monetary policies, and has thousands of years of history as wealth preservation. For this reason, its prices often go up when everything else is tearing down.It can be used to diversify a portfolio and as insurance against any reduction in the market.
Essential Strategies for Commodity Trading
One Good Way to Make Profits in Commodity Trading The recipe for success It's a well-known fact that the perfect recipe for success in trading commodities is: Research You need thorough research and understanding of how the market works. Fundamentals Deep fundamental analysis The first pillar of any strong strategy is deep fundamental analysis. That is, you must be looking behind price charts into the vagaries of real world supply and demand that determine a commodity’s value. In the case of an agricultural product such as corn, this might include poring over weather forecasts, government crop reports and worldwide consumption patterns. For an energy commodity like crude, you'd need to track OPEC output figures, political flare-ups in producing zones and worldwide economic expansion estimated. This careful study is what helps a trader develop a directional bias, whether or not you feel that the commodity in question is fundamentally undervalued or overvalued. A strategy based on these principles is less likely to be influenced by short-term market noise, and more likely to identify sustained long-term trends that materialize over a period of days or weeks (and sometimes even months), allowing for the New Trader’s Plan executives as well founded trading experience.
This second type dovetails with the first by employing disciplined technical analysis on top of fundamentally sound investments. Basics are the reasons why a market may move; technical analysis tells me when and where to do so. This includes analyzing price charts, and utilizing dozens of indicators to help pick out trends, resistance and support levels and when you may want to get into a trade or cash out. For example, a trader could utilize moving averages to signal the direction of the trend proposed by fundamental analysis they have conducted. Then they could refer to an oscillator such as the Relative Strength Index (RSI) or Stochastic Momentum Index to locate overbought or oversold territory, which could have also assisted them with better entry timing. Breakout trading is another favorite of the technicians, established by a position once the price crosses above resistance, or falls below support, signaling a new powerful trend. The synergy between both fundamental and technical analysis is strong - it helps traders establish confidence in their trade set ups, and makes them more likely to pull the trigger.
The last and some would argue the most important one is having strict risk and money management. Given the inherent fluctuation of commodity markets even a well planned strategy can get shaken up by unexpected adverse movement. Therefore, protecting capital is paramount. That begins with determining your risk tolerance for every trade and only investing what you could afford to lose. One important method is the frequent use of stop-loss orders, which automatically end a trade if the price goes against you by an agreed-upon amount and thus limits potential losses. The percentage size of each trade is also very important; you don’t want to be putting too many eggs into one basket, spreading the risk by only investing a portion of your account on any one idea. Besides, an experienced trader knows when it’s time to take some profits not ride a winning trade into a losing one because of greed. This way, with a target profit that is three times as great as the risk of the loss, for instance (while also risking no more than 1 in 3 trades), traders can make sure their winning trades outpace the losing ones in the long run which is what really good trading and sustained profitability are all about.