Published on May 26th, 2021
A commodity is a naturally occurring good that can typically be found in the ground or requires harvesting.
Commodities are separated into two categories; hard commodities, which are usually mined or require extraction like gold and crude oil, and soft commodities which are agricultural, such as wheat and coffee.
Commodities, throughout history have been traded on the futures market, which requires you to purchase a commodities futures contract, meaning that you own the underlying asset.
An alternative approach is to trade through a contract for difference (CFD). This is an agreement between an investor and a broker, stating that the parties will exchange the difference in the opening and closing trade price, when the deal is closed.
Using a CFD, you can trade a range of commodities, including crude oil, which is the most actively traded commodity worldwide.
So, to help you to understand how to trade commodities with CFDs, including how to trade oil CFDs, this article will explain the process, guiding you through in order to help you to develop your own strategy.
Why trade using CFDs?
If you’re looking to start trading in some of the world’s most popular commodities, like oil, gold, silver and natural gas, a CFD will provide you with greater exposure to the market, without having to utilise so much capital.
This is made possible through leverage, which means that you can trade on margin, and only provide a percentage of the total value of the trade, with the rest loaned to you by the broker.
This is a clear advantage that CFD trading has over trading on the futures market, as you will be able to open larger positions than with a future, at a fraction of the cost.
Another benefit of CFD trading is the ability to capitalise on both a rising and falling market, by opening long and short positions depending on the landscape of the market.
If the market is on the decline, opening a short position will afford you the capacity to sell high and buy back cheaply, with the profit that you make here being the difference between the sell and purchase price.
International CFD trading
CFDs can allow you to trade internationally, in some over-the-counter (OTC) markets and are accepted by the majority of main European trading countries.
These include, Spain, France and the United Kingdom, to name a few. CFDs are not universally recognised however, and are not viable in the US.
Risk management tools
Though CFD trading comes with an array of attractive benefits, like any position taken on the financial market, it is not without its risks.
Two of the most common risk management tools that traders employ to reduce the risk of losses are a ‘Close at Profit’ (Stop Limit) and ‘Close at Loss’ (Stop Loss).
With these tools, you can choose a specific rate that your position would close at, if it should fall as low as the level you set.
This will protect your profit, but does not ensure that your position will close at the precise price that you have chosen.
This is because it is dependent on the available price in the market, as there could be price gaps, which could cause slippage.
Since the commodities market is influenced by supply and demand, it can present traders with lucrative opportunities.
Trading in commodities using CFDs can greatly benefit investors, allowing them to utilise leverage to maximise the potential of their capital and open a bigger position on the market.
It is important to remember that you do not own the underlying asset when trading with CFDs and to never invest more than you can afford.