How should you trade a Commodity online?

Have you ever read the headline on falling oil prices and wished you a share of your profits? Now, there are ways to profit from these market trends by trading commodities, from precious metals to crops like coffee and soybeans.

Don’t worry about tons of cocoa and oil actually being delivered when you trade your goods.

This is because the goods are never actually exchanged.

Instead, it is traded through a futures contract that is settled in cash once the trade is completed.

In other words, the broker will calculate the price difference of the Commodity at the start and completion of the transaction and add or deduct the difference to your account.

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How to start trading Commodities with XM?

Foreign exchange trading is like driving. Start by learning how to drive and the more you practice, the better you will be.

Now let’s get ready for the trip.

Step 1: Choose a market

Driving is greatly affected by which vehicle you choose. In the foreign exchange market, this is a currency pair.

There are three types of currency pairs: major (the most traded pair), commodity currency (the currency of the country where the commodity is productive) and exotic (the pair where one currency is the currency of the developing country).

To choose a currency pair You can first check the news to understand the currencies of countries facing economic and political crises.

Let’s check the pip value. If your risk appetite is high, you may consider choosing a currency pair with a high pip value.

It may also combine weak and strong currencies. Decide how to trade with the volatility of your currency pair.

Daily traders will choose currency pairs that are volatile in the day.

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Step 2: Analyse the market

You will consider road conditions and weather before you start.

They affect how far you can go in time, even though they are outside your driving ability. Similarly, Forex analysis determines your success as a trader.

The following are three types of analysis methods.

Fundamental analysis:
The most important factor affecting the exchange rate is the interest rate. Other fundamental factors include inflation, GDP and other economic indicators. However, these factors affect the currency itself by affecting the interest rate. Therefore, it is necessary to consider the impact of these factors on future trends in interest rates when reviewing the latest fundamental releases.
Technical Analysis:
Historical trends may be used to predict future trends in currency pairs. Exchanges are the largest and most liquid market in the world and can use vast amounts of data to forecast. This increases the probability of certain fluctuations. Therefore, learning patterns through various charts can help you decide when to enter or leave a trade.
Sentiment Analysis:
All markets are influenced by sentiment, the psychology of the majority of traders. An analysis of whether the market is on the uptrend or downtrend needs to be incorporated into the trading strategy. If many traders are bullish on a particular currency, they probably bought that currency. The currency is at risk of rapid pullbacks as these buyers will eventually sell the currency.

Appropriate financial, technical, and sentiment analysis will determine the price to buy and sell currencies.

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Step 3: Risk management

After considering these external factors, get on the vehicle and fasten your seat belts.

Risk management is the seat belt for foreign exchange transactions.

Even the most confident drivers need to fasten their seat belts. It does not prevent accidents, but it may be able to minimize the losses incurred. Let’s look at four things to consider here.

  • Stop-loss: Stop-loss is an instruction to close a transaction when the currency price drops to a certain stage. Stop loss helps limit losses if the currency moves in the positive direction.
  • Lot size: Choosing the right lot size is extremely important. Larger lot sizes can cause huge losses if the currency moves in the positive direction, so it is better to choose smaller lot sizes first. Smaller lot sizes are more flexible and help you manage your transactions.
  • Lots: If you are new to foreign exchange trading, refrain from opening multiple lots at the same time.
  • Exposure: It may be wise to avoid excessive exposure to a particular currency. For example, if the USD / Euro is short and the Euro / AUD is long, the euro exposure will double in the same direction.

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What affects the price of Commodities?

But before you start trading these commodities, it is important to understand the factors that cause price movements. Generally speaking, commodity prices are influenced by supply and demand.

If the supply level rises while the demand remains weak, it causes a surplus that can cause the price to fall, that is, an oversupply in the market. On the other hand, as demand increases for limited supply, prices tend to rise.

Apart from that, weather conditions and seasonality are also indispensable market factors to consider.

After all, changes in the weather affect the condition of the grain and can affect the quantity and quality of the commodity during a particular period.

Risk sentiment has a particular impact on the commodity trends of precious metals such as gold and silver, which are treated as hedges against inflation.

Apart from trading commodities for the purpose of profiting from price fluctuations, companies and investors also use these features to hedge against predicted future price movements.

By doing so, you can fix the price of a particular commodity and protect yourself from the potential losses that could occur if the industry were to slump in the future.

These dynamics also work when trading commodities as investors, so it is important to keep an eye on market headlines so that you can identify factors that may affect future commodities prices.

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Contract size, margin limit, and minimum trade size

Some commodities require a minimum of 50 barrels or 10 metric ton contract orders that match the equivalent margin limit, which is an important consideration when determining the amount to deposit in a trading account.

Unlike stocks, commodities do not offer dividends or returns and may be more volatile than certain stocks.

Commodity trading generally leverages trends and is recommended for traders who can hold long-term positions in the market. Also, keep in mind that all CFDs and most other financial instruments carry risks.

When trading with margins, you should trade wisely as you are taking advantage of opportunities to make money and at the same time risk.

On the XM’s platform, commodities are displayed in US dollars to help you calculate potential profits and losses.

Commodities offered range from WTI to crude oil, natural gas, kerosene, light oil, wheat, soybeans, coffee, sugar, corn, cotton and cocoa.

Invest in Commodities with XM