Do you think a trader’s life is easy? You can, but it is a challenging one. If you are not thinking of being a trader as a second thought, then you should definitely be one. In a trader’s life, there is a lot on the plate. It is true that they have a wide range of options, but everything shines from the outside. You may be wondering where we are going with this, right? You have to go through this full blog to know the answer.

A trader can trade in the crypto market, forex market, stock market, and last but not least, the commodity market. The crypto market is at par level; the forex market is a liquidity market that every second person prefers to trade in. However, when there are fluctuations in the stock market, traders prefer to trade in the commodity market to get stability. 

 

In this blog, we will present a guide, especially for novices or beginners, to excel in commodities trading. The guide involves:

• History of Commodity Trading

• Characteristics of Commodity Trading

• Types of Commodities

• Steps to enter commodity Trading for Beginners

History Of Commodity Trading

Compared to stocks and bonds, commodities trading is an older profession with a longer history. The ability of many empires to establish intricate trading networks and enable the exchange of commodities is closely related to their rise to power.

 

In the present era, commodities are traded globally. A commodity exchange is like a central hub where people come together to trade things like crops, metals, and other goods. It’s not just a physical place but also includes the rules and organizations that make sure everything is fair and follows the agreed-upon regulations. These rules cover the trading of standard contracts for commodities and related investment products. So, it’s both the trading floor and the set of rules and organizations that keep everything in check.

 

In recent years, a few commodities exchanges have merged or shut down. While some exchanges focus on a single group, most carry a few distinct commodities. The Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), and Intercontinental Exchange (ICE), located in Atlanta, Georgia, are the U.S. exchanges. There is the London Metal Exchange (LME) in Europe. The London Metal Exchange solely deals in metals, as its name suggests.

Characteristics Of Commodity Trading

In a broader sense, the fundamental idea of supply and demand is what powers the commodity markets. In this market, demand is impacted by changes in supply; a low supply leads to higher costs. Therefore, any significant disruptions in the supply of a commodity, such as a health problem affecting cattle on a large scale, might cause a jump in the normally steady and predictable demand for livestock.

 

Technological advancements and global economic development can also affect costs. For instance, the rise in demand for industrial metals from China and India, two major participants in the manufacturing sector, has resulted in a decrease in the availability of metals, including steel, for the rest of the globe.

Types Of Commodities

Traded commodities are often classified into four main categories: metals, energy, meat and animals, and agriculture.

 

Metals

Commodities like metals include copper, gold, silver, and platinum. Some investors may choose to purchase precious metals, especially gold, during times of market turbulence or bear markets due to the metal’s reputation as a trustworthy, dependable investment with actual, transferable value. Investors can also make precious metal investments as a hedge against times of severe inflation or currency depreciation.

 

Energy

Crude oil, heating oil, natural gas, and petrol are examples of energy commodities. Oil prices have historically risen in response to changes in the global economy and lower oil output from well-established oil wells worldwide. This is because demand for energy-related products has increased while oil supplies have decreased.

The Organization of the Petroleum Exporting Countries (OPEC), technological advancements in alternative energy sources (wind, solar, biofuel, etc.) that aim to replace crude oil as a primary source of energy, and economic downturns can all have a significant impact on market prices for commodities in the energy sector. Investors interested in entering this market should also be aware of these factors.

 

Agriculture

Commodities related to agriculture comprise corn, soybeans, wheat, rice, coffee, cocoa, cotton, and sugar. Grain prices in the agriculture industry can fluctuate greatly in the summer or during any time of weather-related change. Population growth and a restricted agricultural supply can present opportunities for investors interested in the agriculture sector to profit from growing agricultural commodity prices.

 

Lean pigs, pork belly, live cattle, and feeder cattle are examples of livestock and meat commodities.

Steps to Enter Commodity Trading for Beginners

Step 1: Learn About The Exchanges for Commodity Trading

Learning about each of the exchanges where commodities are exchanged is the first and most important step for a trader looking to begin commodity trading.

 

Some significant exchanges in the UK and USA are used for the trading of commodities, including:

• London Metal Exchange (LME)

• ICE Futures Europe

• Chicago Mercantile Exchange (CME) 

• New York Mercantile Exchange (NYMEX)

• ICE Futures U.S.

Step 2: Choosing an Effective Stockbroker

The choice of a trustworthy and effective stockbroker is a crucial next step in the beginning of commodity trading. Some regulatory authorities that a trader can connect to in the US market are:

• Security and Exchange Commission (SEC)

• Commodity Futures Trading Commission (CFTC)

• Financial Industry Regulatory Authority (FINRA)

• National Futures Association (NFA)

 

Because stockbrokers handle the account and execute all deals, choosing a reliable stockbroking firm can be difficult. Through their recommendations, the brokers also assist the traders in becoming knowledgeable about commodity trading and making wise choices.

 

The trader should also be aware of the brokerage cost and other expenses that the broker charges, like commission, clearing fees, platform fees, and more, when choosing a broker.

The services a broker offers on its platform are the main thing a trader needs to think about when choosing one. Nonetheless, many effective full-service stockbroking firms in India provide traders with first-rate assistance in beginning to trade commodities.

 

Step 3: Creating an Account to Trade Commodities

Upon selecting a reputable broking company to commence commodity trading, traders must proceed to the next stage, which is to open a commodity future trading account. They must complete an application and give their broker all the information requested, including their age, income, and financial position.

 

The broker then verifies and examines the data that the  trader has provided. The decision of approval or denial lies in the hands of the company based on the investor’s credit, trading history, and willingness to take risks.

 

To ensure that the trader can settle its debts if the market declines, the broker must do an essential analysis of the data. Upon the trader’s application being approved by the broker, the Demat account is opened instantly.

 

Step 4: Making Your First Payment

A trader must put a small initial investment into their commodity trading account to begin trading. They must, however, deposit the initial margin, which is often between five and ten percent, depending on the contract amount.

 

As an illustration:

10% of the trading unit of gold, or RS 3200, is the initial margin required to trade gold. A trader must keep a maintenance margin in addition to the original margin to cover all of his losses if other unfavourable circumstances affect the market.

 

Step 5: Draft a Trading Strategy

After completing all the requirements, a trader must draft a trading plan to start trading commodities. Creating a trading plan will help you know and comprehend the market. It is also intended to comprehend risk tolerance, financial capabilities, and personal preferences.

It is possible that a trading strategy created by one commodity trader won’t work for another.

 

In this instance, the broking firm assists the trader in acquiring the necessary expertise, experience, and data. To assist the traders in creating a successful trading strategy, they offer them all the pertinent and essential platforms and tools for technical and fundamental research.

 

Additionally, the trader must create a few techniques that fit their goals and trading style.

Last Words

An individual who wants to begin trading commodities needs to be well-versed in all relevant information. To ensure that he doesn’t lose more than he can afford, the trader needs to put all of the strategies into effect. To succeed in commodities trading, a trader must dedicate a great deal of time and energy to preparation.