By Taylor Wilman
Commodities are the backbone of the global economy. The commodities are responsible for all the world economies. Gold and platinum are the key exports for South Africa, crude oil for Saudi Arabia, copper for Chile, and cocoa for Ghana and Ivory Coast. As a result, a decline in the prices of these commodities has a negative impact on the countries and the global economy in general.
There are four main types of commodities. Energy resources like crude oil and natural gas are used to provide energy and power machinery, airplanes, and automobiles. Agricultural commodities like corn, soybeans, cocoa, wheat, and cotton are used for food purposes. Animal commodities too like live cattle, lean hogs, and pigs are used for food. Precious metals like platinum, palladium, gold, and silver are used for diverse purposes while base metals like copper, nickel, and zinc are used for various production purposes.
Most commodities are produced by large companies. Companies like Glencore, BHP Billiton, and Rio Tinto are some of the biggest mining companies in the world. After extracting the commodities, the companies sell them to the global supply chain. For example, copper is bought by utilities companies, cotton is bought by apparel companies, and cocoa by confectionary companies.
The prices of these commodities fluctuate often. Therefore, the buyers often make deals with the sellers. In this, a buyer can promise a seller that they will buy their commodities at a later date at a specific price. By doing this, a buyer locks in the price while the seller locks in a customer. This is the foundation of the futures market. These are then found in online commodities brokers like easyMarkets.
To trade commodities online, a trader needs to understand a few things. First, it is important to understand the demand and supply issues. This is because the price of all commodities depend on their supply and demand. The price tends to fall as the supply increases and vice versa.
To understand these dynamics, traders should use data from credible sources. For crude oil, the Energy Information Administration (EIA) is the main data provider. It publishes the inventories of crude every Wednesday. For agricultural commodities, reading the World Agricultural Supply and Demand Estimates (WASDE) is recommended. This is a report published by the US Department of Agriculture every month. For commodities like coffee and cotton, reading reports from the respective agencies is recommended.
In this line, to understand the supply and demand among market participants. Every Friday, the Commodities and Futures Trading Commission (CFTC) publishes the Commitment of Traders (COT) data every Friday. This data can help you determine how the market is trading.
Second, you should understand how to use the technical indicators. Like in all forms of trading, the role of technical analysis cannot be understated. These indicators are created using complex mathematical formulas to help a trader determine the entry and exit positions. A good way to trade commodities well is to identify the best indicators to use and how to use them. Trading platforms provide hundreds of free indicators to use.
Third, risk management is a very important concept to use when trading commodities. Historically, commodities are usually more volatile than other securities. Therefore, knowing the best way to manage risk is very important. There are a few ways to manage risk. First, you should always use low volumes or lot sizes when opening trades. Second, you should always use a good risk reward ratio on your trades. It is usually recommended to use a risk reward ratio of 1:2. Third, you should use a low leverage ratio when trading commodities online. Finally, you should always protect your trades with a stop loss. A stop loss is a free tool that protects your trades against downside movements.
By Taylor Wilman
