Learning to Trade Commodities: A How-To Guide
Whether referring to gold, oil, copper or even sugar, commodities are some of the most popular underlying assets to trade. As these goods have a real physical value and often reflect underlying market sentiment, many investors prefer their inherent qualities over the more fickle nature of open-market positions. Still, learning the ins and outs of trading can be somewhat difficult for those who are new to this sector. Let us look at some expert tips which will be able to provide you with a winning edge.
The Value of the Dollar
One of the first aspects to appreciate is that the majority of commodities are backed by the value of the United States dollar. Why is this so important? The main reason derives from the fact that a rise or fall in this currency could have just as much impact upon the price of a holding as the performance of the asset itself. A falling dollar value will enable investors to purchase more of a specific asset, so its value will likely rise. The converse is also true. So, always monitor the dollar in order to appreciate when to open or close a position.
Never Add to a Losing Position
This is a common mistake made by countless commodity traders. They assume that a bearish trend will reverse itself within a certain period of time and as a result, they allocate a greater portion of their funds into a losing position. This can cause losses to mount even further. It is best to risk no more than two per cent of your total capital within any single position. Thus, you will be able to mitigate your losses
Trading on Margin
Although some investors will claim that this is an excellent means to generate wealth, we need to keep in mind the concept of exposure. A margin call generally signifies that you are overtrading and substantial losses could soon follow. It is always important to maintain sufficient “breathing room” within an account in the event that a specific exchange suddenly raises its margins. You might otherwise be forced out of a position at a loss.
The Rule of Diversification
Successful commodities portfolios are known for their diverse holdings. This is critical, for losses in one sector (such as gold) may be offset by gains in another (such as oil). This is sometimes referred to as “adding another string to the bow”. Spreading holdings out into a number of discrete sectors is also an excellent way to enjoy profits even in a falling market.
Look at the Big Picture
Assets such as gold and oil will naturally rise and fall during any given trading period. As opposed to following knee-jerk price reactions, look at medium- to long-term trends. Examine support and resistance levels and factor these into your trading strategy. Once the value of an asset breaks through either of these points, action will normally be required. Additionally, a macroscopic perspective can help to lessen the stresses involved with daily trading.
A Ground-Up Approach
It is always wise to learn correct trading habits from those with more experience. Beginners will often choose CMC Markets as their online platform, as there are a host of tools and features available at their immediate disposal.