How to Make Money Trading Commodities
Unfortunately for most Forex traders, they tend to overlook an entire world of potential profit. After all, it’s not just the Euro, the British pound, the Japanese yen, or even the US dollar that people are trading. However, as Forex traders we have a unique insight as to what can move commodities, and most of us don’t even bother trading them!
The US dollar
Keep in mind that one of the biggest drivers of commodities is the value of the US dollar. This is because most commodities are traded in that currency. For example, if you are trying to buy barrels of crude oil, you are going to have to pay for them in US dollars. So if you think about it this way, if the US dollar is very strong in theory it should take less of those US dollars to buy that oil. Conversely, if the value of the US dollar is plummeting, it’s going to take more of those same US dollars to buy oil.
With that being the case, it can give you an idea as to where you could trade crude oil. You could see the same thing about corn, sugar, coffee, and any other commodity that is traded in US dollars. (While there are some markets that allow other currencies to be used to pay for a commodity, you would be hard-pressed to find them.)
Commodities trade just like anything else
Commodities trade very similar to other markets. For example, support and resistance is the same, as well as technical analysis. Since Forex is such a technically driven marketplace, it gives you a bit of a head start when it comes to trading other markets. Forex traders are well known for being some of the most technical in the world, so it makes sense that it translates quite nicely.
Each commodity has a little bit of its own unique personality, but in the end the similarities far outweigh the differences. For example, I find that gold tends to move in $25 increments. Crude oil tends to move in $10 increments. That doesn’t mean that it has to, just that more often than not it will. If you take a chart out, and put lines at those increments, you will see what I mean. $50 means a lot in crude oil, and so does $60. Gold markets are interested in the $1200 level, the $1225 level, the $1250 level, and so on.
Keep in mind that there are a lot of different brokerages that you can use to trade commodities. There are futures brokerages, which of course are highly regulated but they are also very expensive for some traders, as futures markets tend to take much more margin than what you may be used too. If you have a $2000 market you have no business trading futures. However, you can trade contract for difference markets, which are quite often offered by Forex brokers.
The main difference is your account size. Yes, futures markets are very open and transparent, but you also have trouble trading very small positions like you do in the CFD market. It comes down to what you believe fits your personality and more importantly your trading capital when it comes to trading these markets.
Make sure that your brokerage firm is regulated, which most of them will be. There are some brokerages that offer futures and Forex, which again, if you have enough money available, then you can take advantage of this situation. Ultimately this is a market that you should be paying attention to, because you already have a head start compared to most new traders.
Your first move
Your first move of course is to open a demo account. Keep in mind that futures brokerages tend to offer limited demos, so you may have to try several. It’s not uncommon for a brokerage to offer a 14 day trial. With that in mind, it does limit the ability to demo. Most CFD brokerage firms offer longer trials. This is because there is a data fee that brokerages get charged from the CME or the CBOT for example.
By taking the time to demo trade, you can eliminate a lot of the pain associated with the learning curve. However, if you are a technical trader, its likely that it won’t take you long to adjust to these markets. You will find that some are more technical than others, for example gold and oil. At the end of the day, there are a lot of opportunities out there for traders to profit, and by entering the commodities sector, you are adding yet another tool to your tool box when it comes to investing.