So you’ve decided to start in trading in commodities - congratulations! You’ve probably read a guide to commodities investing for beginners so you understand the basics. But do you have enough capital to start commodity trading?
It’s a common misconception that you need tens of thousands of dollars to trade commodities, which isn’t always the case. We’ve outlined how to trade commodities with little money, using leverage to boost the power of your margins.
1. Understand the potential of leverage
Commodities trading can be highly leveraged, which means you can put down a deposit that is a low percentage of the total value of the assets being traded. This greatly magnifies potential gains or losses made from your investment. The deposit — also known as the initial margin — is set for each type of commodity futures contract by the exchange or clearing house.
However, before you start trading, it’s important to know how much margin you have available. This means looking at the total contract value, the recent trading ranges and volatility for the contract, and how leveraged your account will be. Spend some time accessing resources like our free trading courses to get up to speed with commodities trading strategies and understanding the market.
2. Take advantage of spreads
One of the issues with being only long or short in a particular market is that you are overexposed to shocks to the market and economic volatility. Using spreads or “pairs trading” is valuable for hedging systematic risk, because it matches a long position with a short position in a pair of highly correlated commodities.
Profits made from pairs trading are derived from the difference in price change between the two commodities, rather than from the direction each moves. That means a profit can be made if the long position goes up more than the short, or the short position goes down more than the long. The best possible scenario here is that the long position rises and the short position falls.
3. Choose the right broker
Selecting your commodity broker is one of the most important steps when starting out with commodities trading. Most brokers offer online commodities trading, but you want to be sure that they provide a versatile trading platform when it comes to charts, quotes, strategy analysis and order entry. The minimum deposit amount should also be reasonable if you want to start trading with relatively little money.
At ForexCT, our free demo account allows you to start trading with $100,000 in virtual cash, so you can get to know the basics of commodities trading without the risk of losing any of your own money.
Once you open a live account, the minimum account deposit is just $500, which means you don’t need to make a huge investment to start trading in a real-world environment. Some brokers set a higher minimum deposit amount or charge a commission, so make sure to choose one that minimises the risk of losses and expenses when starting out.
Interested in commodities trading? Get started today with your choice of demo or live trading account.