The commodity market is one of the oldest financial markets, and today, it’s more accessible than ever. Traders can now engage in commodity trading either through futures contracts or by using derivatives like Contracts for Difference (CFDs). Trading commodities with CFDs comes with its own set of benefits, including lower capital requirements compared to futures and the ability to profit from both rising and falling markets. In this article, we’ll take a deep dive into how trading commodities through CFDs works.
Who Trades Commodities?
Historically, the participants in the commodity market were producers, consumers, and large financial institutions like investment banks and fund managers. In recent years, however, the market has become much more accessible to individual retail traders. Now, anyone can speculate on the price movements of various commodities without having to own the physical products themselves.
Futures vs. CFDs: What’s the Difference?
In the past, futures contracts were the most straightforward way to trade commodities. A futures contract is a legally binding agreement to buy or sell a specific commodity at a predetermined price on a set future date. However, futures trading typically requires a significant amount of capital and carries higher risks.
In contrast, CFDs offer a more flexible and less capital-intensive method of trading commodities. CFDs are derivative contracts between a buyer and a seller (or a trader and a CFD provider like PFD Markets) where the buyer agrees to pay the seller the difference between the current value of the asset and its value when the contract was initiated. CFDs allow traders to speculate on the price movements of commodities like Oil, Natural Gas, Gold, and Silver without owning the actual assets. The main appeal of CFDs is that they offer leverage, meaning traders can control a larger position with a smaller initial investment, which increases both the potential for profit and risk of loss.
The Basics of Trading Commodity CFDs
CFDs enable traders to trade on margin, which means they only need to deposit a fraction of the total value of the trade. This makes it possible to trade commodity CFDs with much less capital compared to futures contracts. CFDs also allow you to trade both rising and falling markets, making it easier to profit whether prices are going up or down. For instance, if a trader believes the price of a commodity will decrease, they can open a ‘Sell’ position (short), intending to sell high and buy back low, profiting from the difference between the two prices.
Today, retail traders have access to a wide range of commodities through CFDs. PFD Markets offers a user-friendly platform where traders can access various commodities like Gasoline, Gold, Heating Oil, Natural Gas, Brent Oil, Palladium, Wheat, Soybeans, and more. You can start trading with a Demo Account, allowing you to practice with real-time prices from your desktop, mobile, or tablet.
How to Start Trading Commodity CFDs: A Step-by-Step Guide
If you’re ready to dive into commodity CFD trading, here’s how to get started using PFD Markets’ intuitive platform:
- Select Your Market: Choose the commodity you want to trade. PFD Markets offers popular options like Oil and Gold.
- Decide the Direction of Your Trade: If you anticipate prices will rise, you can “go long” (buy). If you expect prices to fall, you can “go short” (sell).
- Set the Trade Volume: After selecting your commodity and deciding on the market direction, specify how many units you want to trade.
- Use Risk Management Tools: CFDs come with inherent risks, so it’s crucial to use risk management features like Stop Loss (to minimize losses) and Stop Limit (to lock in profits).
- Monitor Your Position: After placing a trade, it’s important to keep an eye on your position and your available funds, as market fluctuations can quickly impact your trade.
Keep in mind that when trading commodity CFDs, you don’t own the underlying asset. Always trade responsibly and ensure you never risk more than you can afford to lose.
