Commodity trading is a term that relates to trading terms, but before we dive into commodity trading, let us first define the term 'commodity.'
Commodities are merchandise that can be exchanged with another type of product. We can therefore, define commodity trading as a way through which a range of merchandise is purchased and sold around the world.
Many investors are attracted to commodity trading, because of the possibility of making profit from both rising and falling prices.
Commodity markets can be divided into four categories that include all types of commodities:
Precious metals, of course, include: platinum, gold, silver, and copper;while energy specifically refers to oil. Generally, these two don’t need much of an explanation concerning their identity. Agriculture includes crops, such as wheat, while cultivar commodities, include goods such as cocoa, sugar, and coffee.
The most popular types of goods are crude oil, silver, and gold.
Commodities are not like currencies. There is a law that controls its increase or decrease, and it is known as the law of supply and demand. When a commodity is oversupplied, and there is a lack of demand, prices fall. While in the opposite case, rising demand with lack of supply, causes an increase in prices. Thus, the volume of production is very influential in the fluctuation of prices of various commodities. Also, seasonal changes could affect agricultural production, which, for instance, can be the cause of high or low prices.
Along with seasonal changes that affect the price of crops, is the issue of storage capacity, especially for commodities that belong to the energy category.
Let us explain to you an example of commodity trading - American crude oil. When you think that American crude oil will rise, all you have to do is buy. Let’s assume that oil is at a level of 10534, and we create differences that are worth 20 contracts. This means that for every point that the oil increases, you will get 20 dollars, and we will embody this example in two scenarios:
Let’s say your assumption was correct, and the crude oil increased reaching 10720, and you closed the trade at this level. The price difference between purchase and selling level was 186 points, and with a simple calculation, we can see that you have gained 3,720 USD, since each point is worth $20.
Let's say that your assumption was incorrect, and you stopped the trade on a level of 10,390. Since you purchased at 10,390, the oil would have decreased by 144 points, so your losses would be $2,880.
We can therefore calculate all examples on various other commodities that we mentioned earlier, so you will have a plethora of chances. All you have to do, is accurately predict if the price will increase or decrease. You have to learn what to expect, because trading is all about determining the outcome based on evidence. This will help you to make correct predictions, enabling you to make profits.
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