Before we go any further, what is a commodity? In simple terms, its generally a naturally occurring product that is mined or processed in some way, for example iron, gas or that old ‘Trading places’ favourite pork belly. In contrast, British Gas is not a commodity, British Gas is the the company that provides the commodity – gas.
There are several methods of trading commodities such as spreadbetting and fixed odds trading, but were going to stick to one platform here. We’re going to look at trading commodities using the same method as Forex.
In a nutshell, you will be ‘betting’ on whether or not the price of a commodity will be going up or down over a period of time decided by you.
How To Trade Commodities On The Forex Platforms – Simple Example
The software provided by trading brokers generally has the functions listed below, however one or two functions may be named differently
- You log on to your software
- You look at your Broker’s Gold chart and you notice Gold is on a steady upward trend
- Looking good! So, you decide to put $200 on Gold
- The current price is 950.97 per unit
- With your mini account deal* this gets you 5 units
- You get on with something else, but keep an eye on your screen
- You notice the daily graph is continuing to move upwards, so you hang in there
- When it passes the $40 profit mark, being new you start to get twitchy
- Close the deal? or continue?
- In this case you are smart, and close it, taking away a small, but clear profit of $43.90
- Not bad for a days ‘work’!
- Having a clear strategy to conform to, you decide to quit for the day,
- even though you could be onto more dosh, you decide to quit while you are ahead,
- just in case it does swing in the wrong direction.
- You don’t have to know how this is broken down, as the profit box does everything for you,
- but if you are interested,
- this is how the win is broken down:
- You bought 5 units at 950.97
- You cashed up or closed at 959.75
- a rise of 8.78 per unit x 5 = $44.90
- minus the $1 spread = $43.90
- * mini accounts operate on smaller levels (5 Units) and do not require as much capital
Trading Risk Level – A.K.A. Leverage
- This is where you set the ‘power’ of trade
- You are borrowing, but you don’t have to pay it back if the trade wins.
- If the trade loses, you don’t pay it back either
- It doesn’t increase profit in real terms, however it allows you to trade with less money,
- but if the trade goes the ‘wrong way’ it will close your deal faster than without leverage.
- Borrowing but don’t pay it back? How does that work?
- Don’t worry about it! Just concern yourself with picking a winning trade!
- In the above example the Risk Level was set at 25 which allowed you to open a trade with $200
- You could have opened the same trade with $25 and a Risk level of 200
- (It would have to be 200 x to make up the total to the mini lot size of 5,000)
- You would have won the same amount of money, almost 300% return on your money!
- But as soon as your deal went $25 in the wrong direction,
- you would have lost the lot.
- This is why its called risk level! You decide it!
- Next, you set your stop loss and take profit
- For more detail on leverage and its implications, see our Tips and Techniques
How To Set Stop Losses In Forex Commodities Trading
- Simple, you set your stop loss in actual dollars in the option box
- The level is up to you, but on the example trade above it could be between $100 and $200
- your deal will be automatically closed if the limit is reached
- You can alter you Stop Loss while the trade is still open
- For more details and advice on the implications of setting stop loss levels, see our Tips and Techniques.
How To Set ‘Take Profit’ A.K.A. Profit Target
- This function closes the deal once your preferred profit level is hit.
- With some brokers it is very straightforward. e.g.
- you can select that once your profit hits $200 you want the deal closed (quitting while ahead).
- It’s almost as important as setting your stop loss
- Deciding on the amount should be a matter of policy for you
- In the above example Take Profit could have been set anywhere between $100 and $1000
- You can alter you Take Profit while the trade is still open
- For more details and advice on the implications of setting Take profit levels see our tip and techniques page
Commodities Trading In Forex Platforms – Advantages
- Most Brokers’ software is user friendly, including Trade Options.
- There are a lot of resources available for research.
- The concept of commodities is simpler than other markets.
Commodities Trading In Forex Platforms – Disadvantages
- Most brokers only offer trading in gold, silver and oil, but then again, it’s less to research,
- and as a newbie there’s less temptation to have your fingers in too many pies.
- You can’t set stop loss/take profit to precise figures e.g. $53, only multiples of $50 or $100
Commodities trading on the Forex platform is a straightforward and ‘relatively safe’ way to learn to trade. However, the flip-side of this safer method is that your profits will not be as potentially high as if you were trading commodities through spread betting. If you do feel that you are psychologically more of a risk taker and would like to exploit that, have a look at What is Spread Betting?.