Commodity CFDs allow traders to trade contracts on commodity assets without having to own the physical commodities, and without having to perform physical deliveries on the expiration of the commodity contracts. Commodity CFDs have the following characteristics:
- a) Commodity CFDs track the price movements of the underlying commodities.
- b) Commodity CFD trading is leveraged. Traders must deposit a sum (margin) as collateral for each trade, while they are provided additional amounts which enable them to control larger positions that would have been possible with their capital.
- c) Commodity contracts have expiry dates. Till this date is reached the contract is rolled over. At this time, any open positions on commodity CFD trades will be closed automatically and settled at the closing price for the expiring contracts.
- d) No two commodities have exactly the same fundamentals.
Commodity CFDs can be traded on regular platforms or even as prediction options on platforms of brokers such as Olsson Capital.
Fundamentals of Commodity Price Movements
Each individual commodity has unique factors that influence its price movements. What may constitute an influence on the market sentiment for gold may not be the same as that of crude oil or copper. Therefore, traders who engage in commodity CFD trading are best served to pick just one or two CFD commodity assets to focus on.
Here is a summary of fundamental influences for the commonly traded commodities.
- a) Crude oil: crude inventories, OPEC quotas, political situation in major oil producers and lately, shale oil production levels. For US oil, weather in the Gulf Coast is an important consideration.
- b) Agric-based commodities: weather patterns, supply-demand dynamics.
- c) Gold: economic and market situations across the world which produce a risk-on or risk-off sentiment.
- d) Copper: Chinese industrial/manufacturing data
- e) Cocoa: production -> demand-supply dynamics. For instance, cocoa prices rose during post-election violence in Ivory Coast in 2011. Ivory Coast is number 1 producer of the commodity globally.
Technical Basis for Commodity CFD Trading
Commodity prices can be highly volatile. Day trading is very risky and it is easy to get caught out by wild price moves. Commodity CFD trading is not for beginners.
What should the trader look for on the charts?
- – The prevailing market trend, which is best visualized on the daily chart.
- – Support and resistance levels, (current and historical)
- – Chart patterns (triangles, wedges, etc).
- – Candlestick patterns (morning/evening star patterns, and other strong reversal candle patterns).
- – Information from technical indicators
Commodities are traded in such a manner that a trading day is interrupted by an hour of break,
It is a tall order trying to understand the fundamentals of ALL commodity CFDs. Focus on one or two commodity CFDs and study all you can to understand what news moves the prices of these assets. The essence is to pick out short term or medium term trends in the asset. You must take note of when the current commodity contract will expire so your trade does not get terminated prematurely by a contract expiration.
Once you have a trend that mirrors the market sentiment, search for a technically sound entry and exit points for your trade.
Case Study: Gold/USD (XAUUSD)
In June 2017, global financial markets did not do too well. This created a demand for gold as a safe haven asset, and we saw a gradual uptrend on the asset.
Trigger: long trade.
The technical entry that was spotted was a double bottom, which is a bullish reversal chart pattern. The principles of trading a double bottom are:
- – There must be a neckline, which is a horizontal resistance line that cuts across the resistance to the initial rally after the first bottom has formed. The neckline is extended into the future, awaiting further price action.
- – Once the double bottom is complete, the price must break above the neckline.
- – Once the neckline is broken, the price action is expected to move to a distance which is almost equal to the distance between the 2nd bottom and the neckline (marked A). In other words, the distance in pips marked by A should be equal to the distance marked by B.
In this example, notice how an ascending triangle nestled in the breakout area quite nicely, confirming the upside move. The Stop Loss (SL) would, therefore, be set below the slanting trendline of the ascending triangle, and the TP is set by calculating the distance in pips between the 2nd bottom and the neckline, and extrapolating this to the upside as shown in the snapshot.