When you think of commodities trading, there are a few different ways that you can go about it. You can trade the physical commodity itself, you can trade futures contracts, or you can trade CFDs (contracts for difference). All of these have their own advantages and disadvantages.
So you want to trade commodities as CFDs? In this guide we share all the vital factors you must know to get started.
What are commodities?
Commodities are physical items used in the production or distribution of goods and services. They can be traded on global markets and include oil, metals, agricultural produce and livestock.
How do commodities work?
Commodities are bought and sold through futures contracts. A futures contract is an agreement between two parties to buy or sell a commodity at a set price on a date in the future. Futures contracts are traded on exchanges, just like stocks and currencies.
Why trade commodities?
There are multiple reasons why traders choose to trade commodities. One of the biggest attractions is that they are traded 24 hours a day, five days a week. This means you can open trades during market hours, close them before the markets shut and then reopen them again first thing on Monday morning if desired.
Trading commodities has other advantages over trading other financial instruments. They tend to be less volatile than stocks and currencies, meaning your money is more likely to remain safe while you sit out periods of volatility through price retracement. You can also reduce your risk by diversifying across multiple commodities at once.
How do I start trading commodities as CFDs?
There are several things you should consider when buying or selling futures contracts:
- Contract size – each contract will be for a different amount of the underlying product. For example, one wheat contract will be for 5,000 bushels (several products used as a measure to trade commodities), while one gold contract will require 100 troy ounces (equivalent to 31.1034768 grams)
- Daily Margin – this is an additional percentage set by your broker to cover potential losses on open positions during price fluctuation. It is expressed as a percentage and must be met for you to avoid having your position automatically closed by your broker.
- Price limits are two types of limits; entry limits and exit limits. Entry limit orders only allow the purchase of contracts when they have reached a specific price, while exit limit orders dictate the minimum price at which a trader is willing to sell their contracts.
- Trading hours – each commodity has its specific trading hours, found on most exchanges’ websites.
- Delivery months – when selecting a futures contract to trade, you must decide whether you want to buy or sell the contract for the near (current) month, the next month or an even further out month. The further out you go, the more money you will need to commit to the trade.
Once you have chosen all of the above criteria, it’s time to place your order. You will need to specify:
– The type of order (buy or sell)- The contract size
– The number of contracts you want to trade
– The price at which you are willing to buy/sell
– The delivery month
– The type of limit order (entry or exit)
Bear in mind that some brokers will not allow all types of orders, so it’s always best to check before placing your trade.
Bottom line
Now that you know everything you need to know about trading commodities as CFDs, it’s time to get started! But remember, it’s always important to do your own research before investing any money. Good luck!
