Commodities
Trading Guide

Trading Commodities 

A commodity market is where any trader is allowed to trade raw materials or primary processed products. There are about 50 major commodity markets globally, which make the trading process go easier and smoother. Commodities are divided into two categories: hard and soft commodities. Hard commodities are mined, usually metals like gold, silver, rubber and energy like oil, natural gas. The second category, soft commodities includes agriculture or livestock like corn, soybeans, sugar, pork and more.

One of the biggest advantages of trading commodity assets is the fact that they do not change the value as the other assets in the financial market do. They are considered safe haven for a reason. They protect your capital from the inflation effect. The demand for commodities increases in periods of high inflation, which leads to an increase in their prices. Commodities are also a good bet against the US dollar, during the time the greenback declines, commodity prices go up.

Commodities serve as a great asset to diversify the portfolio, minimize the risk and protect the overall portfolio from market movements. Commodity prices are subject to price movements in the markets because of the exchange rates, interest rates, global demand and global economy. Keep in mind that commodities have a tendency to be more volatile than other types of assets, especially when you track a single asset from a commodity category.

What determines the amount of profit?

– The value of capital invested

– The size of the leverage you choose.

– Commission to open the deal

– Commission to transfer the deal to the next day

– The opening and closing price difference

How to Calculate Profit

The results of commodities trading comes from the difference between the opening and closing price of the asset. In long trading, the profits come from the price rise, and in short trading the opposite happens, the profits are earned from the falling prices.

Let’s make some calculations:

Profit = ((Opening Price – Closing Price) / Current Price) * Capital Invested * Leverage – Commissions

For example, a trader opens a long trade for Gold. The opening price is $57.34/g. The closing price is $57.14/g. $250 was invested. Leverage used 1:100. In these conditions the volume is $25,000, with a commission of $4.

Profit = ((57.34 – 57.14) / 57.14) * 250 * 100 – 4

Profit = $83.5

If you choose to trade without leverage, skip the multiplying part with the leverage.

What are Commodities categories?

Commodities are founded in different types, and are categorized into three major groups:

Metals (Precious and Industrial)
Metals include gold, silver, copper, platinum. They are all highly in demand because of the wide range of usages.

Energy
The energy category includes crude oil, natural gas, gasoline, and heating oil. Energy category is a big player in financial markets, since they are involved in any daily activity. They influence other markets also, like agriculture, because they participate in their production and transportation.

Agriculture
Agriculture is also called soft commodities. They include sugar, cocoa, coffee, orange juice, wheat, soybeans, soybean oil, rice, oats, corn, animals that become food, such as live cattle and pork (called lean hogs), things you wouldn’t eat, such as cotton and lumber.

Multiplier (Leverage)

A leverage multiplies your invested capital, growing your trading exposure in the market. The leverage shows how many times the volume he invested will increase.

Let’s suppose you invest $250 applying a 1:100 leverage. The total trading volume will be $25,000 ($250 * 100 = $25,000).

Keep in mind that the leverage increases both, potential profits and risk level.

A high leverage is suitable for active traders who open and close their trades during the day, meanwhile, for long-term investors, using smaller leverage would be a smarter and safer choice.

The leverage values vary in different types of assets. The larger leverage scopes can be applied while trading currency pairs, and smaller ones while trading digital currencies.