Trade commodities like a pro: what you need to know
There are several key topics to understand if you want to learn how to trade commodities. First and foremost, it’s essential to pick a market that will help you succeed. Then it’s all about executing transactions swiftly.
The basics may appear simple, but becoming a successful commodities trader requires experience. We’ll check out the ins and outs of picking a market and some strategies that professionals use to spot buying and selling possibilities in this blog article.
#1: Finding the correct market
Commodity futures, including gold and other precious metals, are popular financial instruments due to their liquidity and volatility. They aren’t all created equal, though. Traders specializing in these markets understand that each contract is unique and has different possibilities because of its complexity.
If you want to trade commodities, the first thing you must know is your contract. Metals, energies, and agricultural products are among the most widely traded commodities. Metals, energies, and agricultural products are some of the most popular commodities aside from equities indices. You can utilize them for speculative trading, hedging, and portfolio diversification purposes.
#2: Locking in a profit on the market
If you’ve ever shopped at the grocery store, you probably know about buying commodities. Beef, corn, wheat, and pork are all commodities. However, trading financial instruments based on these items is a little different.
The old adage that you make money when you buy rather than when you sell is true. When is it time to buy or “go long” a market? That is the $1 trillion question, to be precise.
Finding value is all there is to it. For example, on April 20, 2020, WTI crude oil futures traded at $-37.63 per barrel.
Oil was worth something, according to almost everyone in the markets. Those who bought May 2020 WTI at the right moment were able to ride a savage $45.00 24-hour surge to a close just above $10.00 on April 21. Although WTI action for April 20-21 is incredibly uncommon, it is an instructive lesson for anyone studying trade commodities.
#3: “Shorting” the market for big gains
When compared to trading equities or ETFs, commodity futures provide a lot more flexibility. Simply said, the game’s goal isn’t only to buy low and sell high; you may make just as much money selling high and purchasing low.
For those unfamiliar with the market, the notion of “shorting” may seem counter-intuitive. However, it is not as complicated as going long. The key is to find value and get in on the action quickly while also balancing risk versus return correctly. Here are examples of two types of contracts that professional traders consider as shorting possibilities:
Overbought: In a variety of ways, a commodity contract may be characterized as being overbought. Using momentum oscillators such as stochastics or the relative strength index (RSI) provides several examples.
Inflated: Because the term “inflation” has several meanings, it is difficult to discuss. On the other hand, a commodity’s price may become artificially inflated owing to breaking news, rumours, or a black swan event.
Shorting the market is similar to “going long” in that it entails identifying worth. When a commodity is overbought and rateably inflated, shorting it may be a helpful strategy; shorting it may be a helpful strategy.
The May 2020 action in May WTI oil is an excellent example of when to bet against a commodity. Oil pricing plummeted into unknown territory after there was a massive supply glut and limited storage capacity. Traders with foresight sold May WTI ahead of time, netting windfall profits and a lesson in how to trade commodities for significant gains.
Visit Saxo‘s website to learn more about commodity trading. It’s a great place to find info on futures and commodity trading, with webinars, trading resources, and blog material.
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