Get Familiar with Commodity Trading Risks Before Entering the Market

To the average trader commodity trading seems to be hard because it needs significant money, expertise, and time. It is a myth! It is simple than you think! Below are some things to consider.

  • Choose a commodity, you feel comfortable with. You can choose gold, silver, oil, natural gas, and even agricultural commodities. The good news is that these are all available with top brokerages like eToro. In case you want to explore their app, you can find more information here on how to use it:
  • In-depth knowledge is essential to make huge profit. Learn what drives commodity prices and even understand how trading works.
  • To trade in a commodity, there will be a need to open a brokerage account. You can check the Fx trading platform The broker is a medium between the instrument you desire to trade in and you.
  • To wager on the fall or rise of the commodity price, you need to learn the supply and demand concept that drives the commodities market. Low supply means high demand, which is equivalent to high rates and vice versa.
  • Determine how much cash you can afford at the start and the duration to play safe initially [trading small amounts]. The decision to trade in a specific commodity needs a study of the past, present as well as future trends of what makes its price fluctuate.
  • Determine if you want to go short [sell] or go long [buy]. During an unusual volatile environment, you can hold commodities for the long term.

Risks of commodities trading

  • Commodities are mostly traded on the futures market. Traders get leverage from the brokerage to increase their chances to get a huge ROI. Leverage cost must also be considered when you are using borrowed capital to trade commodity. High leverage means a high transaction cost. This can consume your trading funds.
  • Every commodity transaction needs a minimum deposit that differs.
  • If the market price dips, then the contract value decreases. The trader will get subjected to a ‘margin call’. It means the trader will need to deposit more cash in their account to maintain the open position.
  • Because leverage amounts are huge, small price movements offer large rewards or losses. In case, your prediction is wrong your account gets wiped out and if your assumption is correct, your account balance doubles in minutes.
  • The contracts have an expiry date and if you fail to exit then you will need to take deliver commodity possession as you are bind to the signed contract.
  • Ensure to get familiar with the contract obligations like commitments, brokerage, or fees before making an investment or signing the contract. Ask the broker about fees or commission before you make a deposit.

The best thing is to get familiar with the brokerage platform using their demo accounts. The demo account will help you practice with virtual money and sharpen your trading strategies.

Non-technical tips for commodity traders

  • If you feel hesitant, over-confident, or scary stay away from the trading market.
  • Patience is essential.
  • Never be over hopeful as you can get stuck in bad bargains leading to high losses.
  • Discussing your position with friends can create confusion. They may share a position with you making you believe your strategy to be incorrect and their right.
  • Exit when price crosses loss limitations.
  • Use proper techniques or move with trends as they rule.
  • Never depend on third party strategies, but stick to your technical knowledge.

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