Commodity Trading

Why should you consider trading commodities?

 Maybe you’ve never traded commodities and focused instead on markets like shares or stock indices, or you’ve been introduced to the world of trading through currency markets.

There are three main reasons why you should consider looking at commodities markets:

1. Portfolio diversification,
2. The negative effect of psychological bias
3. Higher volatility.

Portfolio diversification: A diversified portfolio across different asset classes are viewed as beneficial in terms of mitigating risks and providing a more balanced approach to investing and (to a lesser degree) trading.

Avoiding the ambiguity effect: The ambiguity effect is when you favour something familiar over another choice where the risk is less known. Because you understand another asset class and its potential returns better than, for example, commodities, you may avoid trading in a particular instrument — even though trading in them could potentially produce a better return. By educating yourself to the world of commodities and commodity trading you introduce new ways to diversify your trading.

Higher volatility: Generally speaking, many commodity markets exhibit a more volatile nature than stock indices and Forex markets. Daily price movements in commodity markets tend to be higher. This affords the leveraged trader more scope to make higher gains. If your trading style benefits from higher volatility, then commodity markets could be right for you. However, it must be remembered that with higher volatility comes potentially higher risk and the possibility of larger losses. Also, commodity markets won’t be as attractive if your trading style doesn’t benefit from higher levels of volatility.

Major market participants in commodities trading include commodities buyers and producers, investors, and speculators. Markets and exchanges were established initially to allow commodity producers and users of those commodities to exchange the commodity. As markets and exchanges have evolved to accommodate potential volatility of price movements, investors and speculators have become the major participants in commodity markets.

Bid

The rate at which you can sell the base currency, in our case it’s the Euro, and buy the quote currency, i.e the Japanese Yen.

Ask (or Offer)

The rate at which you can buy the base currency, in our case the British Pound, and sell the quoted currency, i.e. the Japanese Yen.

Spreads

The difference between the Bid and the Ask prices.

Currency rate

The value of one currency expressed in terms of another. Its fluctuation depends on numerous factors including the supply and demand on the market and/or open market operations by a government or by a central bank.

Lot

Usually contract size is based on a lot system, and for most currency pairs 1 lot is 100,000 units of a base currency.

Pip

Minimum rate fluctuation

Account types

Hantec Markets offer a variety of demo and live trading accounts including Joint and Corporate accounts.