How to Choose the Right Commodity to Trade

<p>The commodity markets
are crucial to commerce. The global economy might collapse without energy to
move and build things, metals to manufacture, and grains to create food.
Choosing the right commodity to trade requires knowing why a commodity might
move and the liquidity available to trade that commodity. </p><p>Several strategies can
be employed to generate profits from commodity investing. You can use
fundamental analysis reflecting a specific commodity's supply and demand. You
can employ a macro strategy that evaluates economic growth and how that will
impact the price of a commodity. You can also use technical analysis to
determine the future movements of a commodity price. You can even trade one
commodity versus another commodity, which is a market-neutral strategy. Before
trading commodities, select the commodity that fits your investment style. </p><p>There are also many
different platforms available to invest in a commodity. You can trade a
physical commodity. You can use a futures exchange as well as the over-the-counter
market. You can also trade using a contract for differences or through a
commodity ETF. </p><p>What are Commodities?</p><p>Commodities are essential
goods used in commerce that are interchangeable with other goods of the same
type. <a href="https://www.investopedia.com/terms/c/commodity.asp">Commodities
include</a> crude oil, natural gas, gold, silver, corn, and wheat. Commodities
are physically exchanged, as well as traded on regulated futures exchanges.
Commodities are also sold via contracts for differences through the
over-the-counter market and exchange-traded funds. </p><p>What is Physical
Commodity Trading?</p><p>Physical commodity
trading is the buying and selling physical goods such as oil, gas, metals,
grains, and other raw materials. It involves purchasing and selling commodities
for imminent delivery or future delivery. Physical commodity trading can be for
commercial practices or as a form of speculation, as traders attempt to profit
from price movements in the underlying commodities. Another form of physical
commodity trading is <a href="https://www.investopedia.com/terms/f/futurescontract.asp">arbitrage</a>. </p><p>Transportation
arbitrage is where a commodity trading merchant attempts to purchase a
commodity in one location and move it to another where they can sell it at a
higher price. The merchant can generate an arbitrage if the purchase price plus
transportation and storage are less than the sale price. </p><p>What is a Futures
Exchange</p><p>A futures exchange is a
central marketplace where buyers and sellers of <a href="https://www.investopedia.com/terms/f/futurescontract.asp">futures
contracts</a> can meet to trade. Futures contracts are agreements to buy or
sell a particular asset at a predetermined price at a specified time. Futures
exchanges provide a platform for traders to speculate on the future price of an
asset, hedge against price risk, and manage their portfolios. The most commonly
traded futures contracts include crude oil, natural gas, gold, silver, copper,
corn, and soybeans. Some futures contracts are physically delivered. </p><p>These types of futures
contracts require that the seller provide the buyer with a commodity with
specific criteria on the delivery date. The buyer is required to exchange money
for that commodity on that date. Before delivery, items sold and purchased via
an exchange can be stored in a regulated exchange warehouse or storage
facility. You must open a futures account with a broker to invest in commodity
futures.</p><p>What is Over The
Counter Commodity Trading</p><p><a href="https://www.investopedia.com/terms/o/otc.asp">Over-the-counter</a> (OTC)
commodity trading is buying and selling commodities through a network of
dealers instead of on a regulated exchange. Large institutional investors, such
as hedge funds, often use OTC commodity trading to gain exposure to commodities
without going through the exchange process. </p><p>OTC commodity trading
is also used by smaller investors who may not have access to the exchanges or
who may not want to pay the fees associated with exchange-traded commodities.
Over-the-counter securities are generally financially settled. The contract
between the buyer and the seller has no exchange, and the underlying instrument
used to determine the contract value can be customized. </p><p>What is Contract for
Differences Commodity Trading</p><p><a href="https://www.lowcarboncontracts.uk/contracts-for-difference#:~:text=What%20is%20a%20Contract%20for,the%20lifetime%20of%20the%20contract.">Contract
for Difference</a> (CFD) commodity trading uses financial security to invest in
a commodity. A CFD is a financial security that tracks the underlying movement
of certain commodities. An investor in a CFD is only responsible for the
difference between the purchase and sale price and is not responsible for
taking or making delivery of a physical commodity. To invest in a CFD, you must
open an account with a CFD broker. </p><p>What is a Commodity
Exchange Traded Fund</p><p>A commodity
exchange-traded fund (ETF) is an investment fund that tracks the price of a
specific commodity or group of commodities. It is traded on a stock exchange,
just like a stock, and its value is based on the price of the underlying
commodity. Commodity ETFs expose investors to the price movements of
commodities without having to buy and store the physical commodity. In many
instances, commodity ETFs will hold futures contracts. </p><p>What Commodity Trading
Strategy Should You Choose</p><p>Since several different
instruments and platforms are available, you need to choose the one that fits
your accessibility and trading style. For example, physical commodity trading
requires a lot of capital as it requires you to purchase and store a product
before you can transport it to another location. Businesses are generally more
likely to trade physical commodities, but you might consider this endeavor if
you have access to certain products. </p><p>Futures contracts,
CFDs, and ETFs are all financial products. Some futures contracts also provide
physical delivery, but you can exit your position before the settlement period
or roll it to another contract to avoid dealing with the delivery process. For
example, the West Texas Intermediate futures contract the <a href="https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.contractSpecs.html">Chicago
Mercantile Exchange offers is physically delivered</a>. Suppose you hold the
contract into the settlement and delivery period. In that case, you will be
required to take delivery of WTI crude oil in Cushing, Oklahoma, at one of the
CME's regulated storage facilities. </p><p>Fundamental and
Technical Analysis</p><p>Financial securities
such as CFDs, ETFs, and Futures contracts allow investors to use the risk
management and a trading strategy to enter and exit commodity markets without
the headache of physical delivery. For example, fundamental and technical
analysis are two of the more popular types of research used in gold trading. </p><p>Commodity <a href="https://www.investopedia.com/terms/f/fundamentalanalysis.asp">fundamental
analysis</a> includes determining supply and demand. For many commodities, this
process is global. Commodity analysts often use a balance sheet describing the
total supply and use of a commodity and what is expected to be left over at the
end of a marketing year. </p><p>Another type of
fundamental analysis is macro analysis. Instead of determining the specific
likely supply and demand, you determine if future global growth or contraction
will occur. You might need to incorporate interest rates and stimuli to
evaluate if there is likely to be economic growth. Commodity prices are more
likely to rise when growth occurs as consumption increases. </p><p>The reverse is true
when economic growth contracts. Another popular type of analysis is technical
analysis. <a href="https://www.investopedia.com/terms/t/technicalanalysis.asp">Technical
analysis</a> is the study of past price movements to determine the future
direction of a commodity. Technical analysts often use charts to determine
support and resistance levels. Support and resistance are levels in the market
where the price of an asset has difficulty in either breaking through or
falling below. </p><p>Technical analysts
might also use statistical studies such as trend following and momentum.
Popular trend-following strategies include a moving average crossover. A <a href="https://towardsdatascience.com/making-a-trade-call-using-simple-moving-average-sma-crossover-strategy-python-implementation-29963326da7a#:~:text=A%20moving%20average%2C%20as%20a,a%20longer%20period%20moving%20average).">moving
average crossover</a> is a trading strategy that uses two different moving
averages to identify a trend in the price of an asset. When the shorter-term
moving average crosses above the longer-term moving average, it is a signal to
buy the commodity. Conversely, when the shorter-term moving average crosses
below the longer-term moving average, it is a signal to sell the item. </p><p>Momentum indicators can
also tell you when a commodity is overbought or oversold. For example, the <a href="https://www.investopedia.com/terms/r/rsi.asp">relative strength index</a>
(RSI) is a momentum oscillator that measures the changes to a commodity price to
evaluate overbought or oversold conditions. The RSI is an oscillator that can
read from 0 to 100. Levels below 30 are considered oversold, while levels on
the RSI above 70 are considered overbought. </p><p>The Bottom Line</p><p>Commodities are items
used to power your car and build your home. Commodities are also in the foods
we eat and the products we drink. The best commodities to trade are the ones
that are the most liquid and fit within your trading style. </p><p>There are several platforms
and products available that can <a href="https://www.iforex.in/education-center/silver-gold-trading">facilitate
commodity trading</a>. Most investors are more likely to trade financial
commodities than physical commodities. Physical commodity trading requires
access to storage facilities, transportation, and large volumes of capital. </p><p>The most popular types
of securities for trading commodities include CFDs, futures contracts, and
ETFs. There are also several types of trading strategies that you can use to
trade commodities. The most popular research includes fundamental and technical
analysis. Before pulling the trigger on a commodity trade, ensure you find the
security and platform that fits your trading style. </p>

This article was written by FL Contributors at www.forexlive.com.