Commodity trading is a popular investment strategy for people looking to diversify their portfolios. The basics of how to get started with commodities are the same as those used in other types of trading, but some unique considerations apply when you trade metals. These include:
Research the investment thoroughly before you begin.
- Identify the trend of the commodity(s) you’re trading in.
- Use technical analysis to find an entry point, such as an indicator or chart pattern.
- Consider using a commodity broker instead of an online brokerage if you are going to trade futures contracts that include the physical delivery of your goods.
Choose a specific commodities market to trade in.
Selecting the right market is essential, as it can make or break your trading career. The first step in determining which market is best for you is researching all available markets and deciding which fits your needs best. The most common commodities markets are:
- Agricultural products (such as corn, wheat, and soybeans)
- Energy (oil, natural gas)
- Gold and silver bullion (coins)
- Precious metals and gems (platinum group metals and diamonds)
Identify the trend of the commodity(s) you’re trading in.
Now that you have an idea of the metal(s) you want to trade, it’s time to identify the trend of the commodity. This is critical information, as it will help determine if your strategy will work before buying or selling.
When determining which direction a metal is moving in, look at its price history over time and evaluate three things:
- Whether there is an overall uptrend in prices (i.e., more money has been made than lost).
- What type of trend represents this pattern (i.e., whether it is rising steadily or moving up and down in a sideways fashion)?
- How long has this pattern been in place for each asset class under consideration (i.e., does this asset class have several years’ worth of consistent data showing trends?)?
Use technical analysis to find an entry point.
The first step is to create a trading plan to trade metals. A trading plan is a written record of your goals, strategies and rules for each trade you make. It helps you stay focused so that when the market gets crazy, your emotions don’t take over.
Some metals you may want to invest in include gold, iron, lead and tin.
Gold has historically held its value over time. You can buy gold in small or large amounts depending on your budget. Gold is a good investment because it is scarce and in demand by many people worldwide for jewellery purposes.
Other metals can be purchased as investments, such as aluminium, copper and silver (less prevalent than gold but still have some value).
More than 80% of the world’s iron ore production comes from five countries — China, Australia, Brazil, India, and Russia.
The next step is to identify the trend. You’ll want to note how the market is moving and how much it’s moving. If it’s moving a lot, you might have some extra time before the price changes. On the other hand, if prices are moving very little or not at all, you can agree immediately.
Here are some basic rules for identifying trends in trading metals:
- Look at historical data on price movements over time (daily, weekly or monthly) and compare it with current levels;
- If a stock has gone up significantly over several weeks or months but has recently dropped in value by 20% or more from peak levels, buy now because this indicates that its recent high price was likely part of a longer-term upward trend.
Commodity trading isn’t all that different from trading stocks or bonds — the same fundamental lessons apply. All of these assets have a price, value, and underlying asset. The only difference is which commodity you’re going to trade. If you’re interested in this type of trading and want to get started, we recommend researching the best ways, depending on your goals and risk tolerance.