What is commodity trading and how does it work?

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Like any form of trading, commodity trading involves buying and selling assets. The hope is that you can make a profit from the rising and falling price of the asset you are trading. This is done by correctly predicting the direction of the value - which is determined by the supply and demand of the market in question.

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As you probably know, commodities are usually raw materials that are tangible and used to make and operate other goods. Think of industrial and construction products such as steel and oil. There are also tradable materials such as gold, silver, copper, and lithium, which are commonly used in the electronics industry.

In terms of "soft goods," you can trade everything from wheat and soybeans to sugar, frozen orange juice, and even livestock. We'll cover tradable commodities shortly, so stay right where you are.

How does commodity trading work?

We believe that an example is a great way to explain the trading process of an asset. With that in mind, below you'll see a practical example of a commodity trade. In our example, you are trading the most traded commodity in the world - gold.

  •     At 1,900 USD per ounce - you think gold it is undervalued.
  •     With this in mind you place 1,000 USD buy order with your broker
  •     If the price of gold rises above 1,900 USD and you exit the trade, you profit

Now, based on the premise that you believe the price of the asset is overvalued:

  •     With this in mind, place a sell order with your broker
  •     If you are correct and the price drops, you profit

One of the best things about trading commodities online is that you can make money whether the asset's value goes up or down. Of course, you first need to guess the direction of the asset correctly. This can be achieved by predicting where the market sentiment is on the asset.

  •     If the value of an asset is on a downward trend, this indicates a "declining" market.
  •     If the price of the asset in question is rising, this is a characteristic of a "bullish" market.

In addition, online brokers offer leverage on commodity trading. The leverage you are offered depends on the country you reside in. In the UK and the EU, leverage is limited to 1:10 for most commodities and 1:20 for gold. This means that you can multiply your bet by 10 or 20 - call it a credit from your broker.

As mentioned earlier, all you have to do is speculate on whether the asset's value will rise or fall. Next, place the corresponding order and specify how much you want to bet on the position.

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Below is another example of how commodity trading works:

  •     You open an account with a commodity trading brokerage firm
  •     You deposit 1,000 USD into your new account
  •     Next, you place a buy order of 200 USD for Brent crude oil - 30 USD per barrel
  •     2 hours later Brent crude is valued at 35 USD
  •     This shows a price increase of 16.6%.
  •     You place a sell to cash in your profits from the position
  •     With your initial bet of 200 USD you have made a profit of 33.20 USD

As our example above shows, you can enter or exit a trade at any time. Whether that goes short and close your trade with a buy order - or close a buy order by creating a sell order. After you understand exactly what commodity trading means, we can discuss the various ways these assets can be traded.

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