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How to Trade Commodities


Commodities are traded in much the same way as shares and indices: traders try to make a profit by buying commodities and then selling them at a higher price than they were purchased for. It is also possible to aim to make a profit by buying commodities back at a lower sum than they were originally sold for.


Commodities are derivatives – when spread betting and CFD trading commodities, traders do not take ownership of the commodities, but are speculating on the future market movements.


Trading Rolling Daily Vs Futures

When it comes to Commodities, there are two main ways of trading; ‘Rolling Daily’ and ‘Futures’ contracts. ‘Rolling Daily’ contracts are based on the present price of that particular commodity at this point in time, rather than on a prediction of what that commodity’s value will be at some point in the days, weeks or months ahead.


Rolling daily contracts tend to be used by short-term traders. They have tighter spreads than futures contracts, and will ‘roll over’, meaning that they keep going from one day to the next until the position is closed.


By contrast, with futures investors predict whether a commodity’s price is likely to increase or decrease within a pre-agreed length of time. The contract is an understanding that a commodity will be traded at a pre-set price and at a pre-set time.

COMMODITY TRADING: A CASE STUDY

COMMODITY TRADING: A CASE STUDY

Rolling_Daily

COMMODITY TRADING: A CASE STUDY

A trader must first choose which commodity to trade. It is really important to choose a commodity that you would like to learn more about and perhaps that you already have an understanding of, as this will better motivate you to read relevant news events and reports and so make better-informed trading decisions.

The range of commodities you can trade varies between brokerages. ETX Capital offers a large selection of commodities to trade, including metals, energy, and agricultural commodities.

COMMODITIES TRADING EXAMPLE: ROLLING DAILY FORMAT

COMMODITIES TRADING EXAMPLE: ROLLING DAILY FORMAT

Commodity_Trade

COMMODITIES TRADING EXAMPLE: ROLLING DAILY FORMAT

In the following example, a trader decides to trade gold in its rolling daily form. The current price of gold in this hypothetical scenario is 1085.2/1085.7, meaning that the metal’s ‘sell’ price is 1085.2 and its ‘buy’ price is 1085.7. The trader feels that the price of gold will increase, and therefore makes the decision to ‘go long’ and ‘buy’ £10 of gold at the 1085.7 level. After a few days, gold is trading at 1087/1087.5, and the trader decides to close out at this point.

We would work out the profit level of the trade by first seeing how many points the trade had moved. In this case, with each point being 0.1, we can see that the trade has moved by 13 points (1087-1085.7=1.3). 13x10=£130, which would be the profit level of the trade.

However, if the trader had instead opted to ‘sell’ £10 of gold at the original 1085.2 level and then closed off the trade at this point, they would make a loss. We would calculate this loss level as follows;

(1087.5-1085.2=2.3). Since each 0.1 is equal to 1 point, there has been 23 points of movement. If we then multiply that by the amount put into the trade per point, the loss level would be 23x10 = £230.

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