For those looking for somewhere to park their money or seeking alternative financial solutions, commodities trading isn’t the first one that comes to mind. But in reality, this type of trading is a good option for those looking to raise capital or earn extra income. But with all the commodities available, which one is the best to help you achieve your financial goals?
When selecting a commodity to trade, you must choose one based on your tolerance risk, available capital, and professional knowledge. Unlike the stock market, commodities trading involves more than dabbling, so you will need to devote some time educating yourself not just on the commodity you choose but how the market moves. Commodities are highly volatile; traders must prepare themselves emotionally, which can play a significant role in trading commodities.
To start with commodities, choose to trade one that you already have background knowledge in. After that, it is best to evaluate and re-evaluate your propensity for risk.
Selecting the right commodities to trade
Professional commodities traders mostly concentrate on one or just a few commodities. There is sound logic behind this approach as they can intimately understand all the little nuances of a commodity that traders who trade everything miss.
The most popular trades are in precious metals (gold) and crude oil, while the less exciting options are in corn and soybeans. For traders who are looking for a quick scalp, coffee futures can be traded because the market sentiment can change drastically in a short period. If you feel like day trading is for you, many trade oil and e-mini S&P. Oil is one of the most popular commodities to trade.
Investing in crude oil isn’t as easy as other commodities—you can’t just buy a barrel of oil. As an investor, you may consider futures—the most direct method of owning the commodity outright. But futures can be highly volatile and need a good deal of capital. And they also require a lot of knowledge, so it’s not really a good option for novice investors.
The volatility of these markets is unbeatable, but this means that there are more trading opportunities available. It is also best to only trade commodities that are liquid, as specific trading setups will occur with greater frequency. Markets and trading conditions often change that’s why some commodities may offer good trading opportunities one year but not the next. Commodities also require day-to-day monitoring since global supply can change within minutes.
Volatility of commodities
When trading commodities, you need to make sure that your trade commodity will fall into your risk parameters. Some commodities make small moves, while others make big swings.
“As a trader, you need to realize that not all commodities have equal risk. Make sure that the amount of risk is suitable for you when you pick a commodity to trade. This is a crucial decision since commodities experience exceptional movement on even the rumor of important news. You need to be ready when prices fluctuate,” Jerold Sheppard, CEO of Remington Sterling, a commodity financial firm.
If you want to determine the volatility of each commodity, you can check the futures margin. This is the amount that future exchanges require as a deposit on each futures contract you open. The margin used here is based on various factors, but it mostly has to do with the daily price swings of futures contracts.
According to a paper published in Resources Policy that talks about the volatility of commodities, “extreme price dynamics, higher short-term volatility, and increasing level of co-movement in commodity prices are far beyond the explanatory power of the standard demand and supply framework . As a consequence, factors that may affect commodity price movement have become more complicated.”
This is why commodities prices are volatile, and as traders, this should be one of your deciding factors on what type of commodity you will be trading.