The Commodity Market

The Commodities Market

How to Spread Trade Commodities

Commodities have been growing in popularity for speculators since spread trading has allowed home-based traders to bet on the price movements without having to physically own the commodity. Previously, professional traders would have invested in large, expensive lots of gold, barrels of oil or tones of agricultural products. For a long time these barriers to entry prevented many home traders from actively trading price movements, however, the expansion of spread trading markets to incorporate almost all asset classes has made commodity price speculation possible for any trader.


Commodity Markets Trading

Spread trading commodities such as oil, gold and coffee is as straightforward as placing a spread bet on any stock or currency movement. One of the major attractions for commodity spread betters are the substantial profits which can be made with correct long-term spread bets on the fundamental influences of commodity markets. Recent gold speculators have made considerable profits on the recent rise in gold due to the economic uncertainty and financial crisis affecting many European countries. As a general rule, commodities such as crops are affected by weather patterns, oil by the strength of its supply and gold by the instability of currencies as well as global economic sentiment.

The prices of many commodities are also affected by short term swings and technical analysts find many opportunities spotting intra-day patterns in commodity price charts. Spread trading commodities can be highly profitable; however, before engaging in spread trading it is imperative to remember that, as with all speculation, this form of trading can lead to substantial losses. The unpredictable volatility of some commodities can offer great opportunities but can also quickly turn into losses without a robust risk management strategy.

Spread trading commodities can be done in exactly the same way that bets can be placed on other commodities. The price of individual commodities is quoted as two prices; the higher buy price and the lower sell price. The spread between these will vary subject to the volatility of the market and, similarly to currencies and stocks will tend to widen at times when price is moving quickly. Commodities can also be traded using a variety of trading indicators; these include the popular momentum indicators such as stochastic oscillators, and also the trend-following indicators such as moving averages. The tendency for commodities to follow long-term trends is due to the fact that they are influenced by large, underlying fundamental influences. This allows spread betters to utilize moving averages a tool to determine the general direction of price in order to enhance the probability that the spread trade will be profitable..

Commodity spread trading requires a trader to have a good basic understanding of global affairs and events which will directly affect commodity markets.  Anticipating seasonal changes, for example, are paramount for soft commodities such as rains and coffee. During times of drought most crop commodities do not perform well in the commodity market, therefore, many long term traders and spread betters may hedge their positions with other commodities or assets in order to reduce their vulnerability to natural shocks. Instability in regions where the oil supply is concentrated often has a negative impact on the commodity. Anticipation of these events can also lead to very profitable short spread trades.  Reduction or disruption in the oil supply can cause price to spike higher very rapidly. Awareness that cartels such as OPEC operate in the oil market is important in order to realize that oil prices can be stabilized rapidly after such shocks.

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