Commodities are basic goods that are used in commercial activity. They are fungible i.e. interchangeable with other commodities of the same type. They are typically used as inputs for the production of goods and services.
Commodities trading forms the bedrock of global economic enterprise. Typical examples of commodities include wheat, coffee, livestock, natural gas, crude oil, gold, silver, and platinum.
We consume commodities every single day of our lives, from the food that we eat to the gasoline and powers are engines, and the jewellery we adorn ourselves with.
You can trade commodities at exchanges all over the world, and these trades typically take the form of future contracts.
Guide to Commodity Trading
Every day, traders engage in commodities trading. Such is the breadth and scope of commodities trading that it is virtually impossible to gauge the size of the commodity market. Experts have pegged the value at hundreds of trillions of dollars.
It is true what they say: Commodities trading forms the backbone of the global economy.
Futures contracts are agreements to trade commodities at a fixed price and date. At AvaTrade Australia, our advanced platforms offer CFDs (Contract for Difference) – derivatives trading instruments for commodities. CFDs are based on the underlying price of the financial assets, and do not confer ownership of actual commodities.
Commodities traders enjoy the benefits of CFD trading, since it is not required to take physical possession of barrels of crude oil, bars of gold, bushels of wheat, or actual livestock. This facilitates ease of trading, at any time.
AvaTrade Australia offers a large variety of commodities CFD trading options, tailored to a diverse range of markets, including energies, metals, agriculture, et cetera.
- Access 24/5 live customer support in your language
- Enjoy competitive spreads on commodity trading options
- Start trading commodities with a small AU$ account and trade up using leverage
- Hard or Soft commodities trading options are available on the powerful MetaTrader 5 platform
- Trading commodities is available anytime, anywhere with the AvaTradeGO app for Android and iOS smartphones and tablets
AvaTrade commodity trading options are available now. Enjoy ready access to commodities trading tools and resources, at your leisure.
Commodities Trading Unmasked
As mentioned earlier, commodities are goods that are used in the market, or as part of business activity. In order for a commodity to be traded, it must conform to specific standards, and grades. This grants it fungible goods status. This refers to its interchangeability in the financial markets.
Granted, not every commodity is 100% identical but they are regarded as identical among producers.
In the world of commodities trading, a key distinction can be made between hard commodities and soft commodities.
- What are hard commodities?
A hard commodity is one which does not grow. It is mined. Diamonds, gold, silver, platinum, crude oil, and natural gas are classic examples of hard commodities.
- What are soft commodities?
A soft commodity is one which does grow. It is farmed, or processed agricultural products. There are plenty of examples of soft commodities such as wheat, sorghum, corn, livestock, cotton, coffee, and sugar. Soft commodities are extremely sensitive to weather and the elements, and they are cyclical, subject to seasonal price patterns.
Trading Commodities Online: Size and Margin Requirements
Understanding Commodity Prices
Commodity prices fluctuate from day to day, based on a multitude of factors. These include:
- Supply and Demand
All economic goods are subject to the principles of supply and demand. When there is excess supply, prices decline. When there is excess demand, prices rise. When supply and demand are balanced, prices remain constant.
Speculative sentiment such as expectations of a surplus or a shortage of commodities will affect prices accordingly.
If, OPEC cuts oil production, supply will decrease and prices will rise. If weather is expected to adversely affect agricultural produce, a shortage will ensue and prices will rise. These expectations have an outsized impact when trading commodities.
- Stock and Inventories
A host of factors can impact commodity prices vis-a-vis stock and inventories. These include macroeconomic factors, taxation, trade agreements, government subsidies, geopolitical considerations, labour issues, production capabilities, diseases, weather and the like. When trading commodities, it is wise to assess a broad basket of variables.
- Currency Strength
There are strong connections between heavily traded commodities such as gold, oil, natural gas, and popular currencies. For example, the correlation between the gold price and the US dollar (USD) is ironclad.
The Canadian dollar (CAD) is closely correlated with the price of oil, given that Canada is a major crude oil exporter. By staying abreast of these connections and associations, it is possible to time trades, and monitor commodities trading much better.
The majority of commodities are priced in USD, the world’s reserve currency.
- Inflation Expectations
Inflation is defined as a general increase in prices. Inflationary pressures affect commodities trading by increasing the price of mining, or cultivating commodities. Deflationary expectations can also affect commodities trading to the downside.
Understanding Price Movements with Commodities Trading
Commodity Trading with AvaTrade Australia
When trading commodities online at AvaTrade Australia, it’s important to understand that you are trading price movements of the underlying financial instrument. No ownership is conferred of any specific commodity.
A diversified portfolio comprising multiple different commodities can be lucrative, with increased ROI (return on investment). It is worth pointing out that commodities do not pay dividends, and bankruptcy is not a consideration either.
Commodity CFD Trading Advantages:
- AvaTradeGO is a world-class trading app for commodity CFD trading.
- Commodities trading is an effective hedge against inflationary pressures. During inflationary times, prices rise, benefiting commodities traders.
- Owing to the fact that commodities CFDs are traded with substantial leverage, outsized gains are possible with commodities. Be advised that there are downside risks to leverage when trades don’t finish in your favour.
- With commodity CFDs trading, prices don’t have to rise for profits to be generated. You can profit from bullish (LONG) or bearish (SHORT) movements in commodity prices.
- A minimum deposit amount of AU $250 is required to start trading commodities on your PC, Mac, or mobile, making these low-cost trading options.
- Clients can trade commodities with automated trading platforms across multiple supported devices.
Commodities Trading FAQs
What are the world’s best commodities to trade?
When it comes to commodities trading, two particular commodities dominate – gold and crude oil. Both of these commodities are highly liquid. Plus, there’s lots of information for traders and investors to access with regards to gold and crude oil. Having said that, there are many commodities that may be better for trading purposes.
If you have an innate understanding of a specific commodity, you are automatically at an advantage. Detailed information about demand and supply factors, can certainly make it much easier for you to profit off commodities trading. By employing your knowledge of commodities in this way, you automatically place yourself in a much stronger position.
Thorough knowledge of commodities trading is not a guarantee of profitability, but it certainly makes it easier to achieve success with commodity CFDs.
Why are commodity CFD options better than traditional commodities trading?
The majority of retail traders and institutional traders use futures markets to trade commodities. These futures contracts require a sophisticated understanding of the financial markets, and a futures trading account. For one thing, substantial investments are required upfront – a disincentive for the vast majority of recreational traders out there.
Futures contracts are leverage-based financial instruments. This means that you can amplify your gains, but you can also magnify your losses if trades move against you. Fortunately, commodity CFDs largely obviate these issues. With a few hundred Australian dollars, you can enter the potentially lucrative commodities trading arena and start trading precious metals, energies, and agricultural commodities.
At AvaTrade Australia, traders have full control over-leverage, or the absence of it, whenever commodities trading is undertaken.
Can you trade commodities online?
Back in the day, Wall Street brokers and commodities traders would be barking buy and sell orders back and forth from trading pits. You’ve probably seen this type of activity in movies like the Wolf of Wall Street, or even Wall Street Money Never Sleeps.
Nowadays, pretty much everything has gone virtual. The democratisation of commodities trading online at world-class brokerages like AvaTrade Australia is a case in point. You can confidently trade commodity CFDs with our powerful trading platforms right here at AvaTrade. Simply pick your preferred commodity CFDs, and start trading.
As a new commodities trader, you are in excellent company. We’ve got a wealth of trading tools and resources to help you. Click to open your account today!