Commodities represent a massive market for investors. Whether referring to oil, gold, coffee or soybeans, these physical assets can have an equally physical influence on any wealth management system. Still, there is much more involved than simply buying and selling a certain position at a discrete price when learning how to trade commodities.
Commodities trading takes years to master and nothing replaces experience. There are nonetheless a few tips and hints which can shorten the learning curve while providing the trader with valuable guidelines to follow. What are a handful of “golden rules” that professionals have embraced for years?
How to Trade Commodities
The Dangers of Over-Trading
Unlike the mantra espoused by Gordon Gekko in the movie Wall Street, greed is not always good. One common and potentially fatal mistake that many traders make is to over-trade a certain position. To put this another way, the investor will risk entirely too much capital within a single trade.
Many experts recommend risking no more than 2% of one’s entire holdings at any given time. Even if the position moves in the wrong direction, one’s finances will not be completely wiped away. The point of commodities trading is not to look for a “clean sweep”, but rather to amass wealth over time.
The Almighty Dollar
Always follow the value of the United States dollar in relation to other currencies. As the majority of commodities are valued in dollars, their physical worth is ultimately determined by any movements that this currency makes.
Thus, it is also wise to follow the interest rates set forth by the Federal Reserve; these correlate directly with the dollar.
The Role of Geopolitics
Trading commodities also centers around the role that geopolitics will play. An example here can be oil. Let us imagine that a sudden crisis in the Middle East shuts down the production of wells within Iraq. A decreased supply will naturally cause the price of crude per barrel to rise.
It cannot be stressed enough that current events, politics and conflicts all have a very real influence upon the price of commodities. This principle holds just as true for orange juice as it does for silver and gold.
Diversify Your Holdings
What goes up and can will come down. Commodities are no different. Much like in other areas of the stock market such as currency pairs, it is best to diversify one’s holdings.
It is all too common for novice traders to be interested in precious metals and oil while neglecting to spread their capital over additional assets. Should the value of one discrete sector drop, this movement may be offset by holdings within another area.
Trading Platforms
Why trade commodities utilizing a substandard platform? Those who hope to enjoy success should only employ the best software in the industry. CMC Markets offers a range of different assets alongside some of the most powerful trading software in the business today. Thus, even beginners can keep up to date with all of the latest events and execute a position at the right time.
Trading commodities involves time, patience and experience. It is still an undeniable fact that adopting these strategies from the very beginning can help to cement a strong foundation that will eventually lead to financial success.