The world of commodity trading can be incredibly lucrative. However, there are several hurdles that new comers will need to get over if they plan on trading commodities in the traditional sense. For example, the commodities market is incredibly volatile; leading to more opportunities along with a higher level of risk. So, managing risk becomes more difficult. Also, in order to trade commodities, traders need to come up with a large amount of money. After all, most commodities have trade minimums. For example, if you plan on trading crude oil, you'll need to trade in blocks of 1,000 barrels. At current rates that's around $60K per trade. Of course there is leverage that is used, in most cases at a 1:10 rate; but the cost still pans out to be around $6,000; a number that the average new comer simply couldn't or wouldn't be willing to spend on one trade.
Binary Options Are The Answer To The Issues
The inherent difficulties associated with commodity trading don't necessarily mean that new comers can't trade commodities. As a matter of fact, binary options provide the perfect vehicle to do just that. You see, when trading binary options, the inherent difficulties that come along with trading traditional commodities become positives. For example, high volatility opens up the doors for several profitable opportunities. And since you know the amount you can gain or lose before making a trade in binary options, risk becomes easier to manage. Also, binary options brokers don't require traders to make excessively large trades. As a matter of fact, a trader can enter into a binary options trade for under $100.
Analyzing the Commodity Market To Ensure Success
When trading commodities with binary options, there are three primary assets that are offered; Gold, Silver, and Oil. Therefore, if you plan on trading commodity binary options, it's important to learn how to analyze these markets in an attempt to predict future price movements. Technical Analysis Is Key, But Don't Forget About Fundamental When trading binary options, you're making short term predictions with regard to price movements. So naturally, when making these trades, technical analysis will be incredibly important. This includes the analysis if trends in the market using moving averages and other quantifiable data. By tracking trends, you can get a good idea of where the asset's value is likely to go moving forward. On the other hand it's important not to forget about fundamental factors that tend to affect the value of commodities. For example, when an economic report is released showing positive economic data, we can expect inflation; leading to higher oil prices. So, by tracking fundamental factors, you'll be able to find trends that can be later analyzed using technical tools.
What Factors Play A Role In The Price Movements Of Crude Oil?
When it comes to crude oil, there are three main factors that play a role in the movement of its price. Those include…
Supply – As the law of supply and demand tells us, when supply is high, the price must drop to make the commodity more appealing. However, when supply of crude oil is low, we tend to see dramatic increases in the commodity's value.
Demand – When demand for oil is high, we tend to see the value of the commodity climb. However, when demand for oil is low, the value will generally fall.
Reserves – Reserves play into the supply of the commodity. With more crude oil in reserves, the price must fall so that oil can be sold faster; making more room for future oil production.
All of these factors came into play in a big way recently. As the demand for oil grew over the past few years, the price skyrocketed to all-time highs. As a result, the United States started shale production and oil started to come from Canadian oil sands; all while Saudi Arabia and other OPEC member nations increased output. As a result, we ran into a crude oil supply glut in 2014 that's now being coined as an oil crisis. During this time, the price of Crude oil fell from over $100 per barrel to under $50 per barrel. Still, demand moved slowly for a few months causing reserves tanks to become close to topping out. However, recently demand for oil has climbed and supply has dwindled as the producing oil proved to be more difficult than the reward was worth. So, over the past few months, the price of oil has been climbing upward. If you haven't decided yet what strategy to follow, you can check our binary options strategies page.
Analyzing The Precious Metals Market
Precious metals are unique from any other commodity on the market. That's because the price doesn't only depend on supply and demand, it depends on market and economic factors. You see, precious metals are known as a safe haven investment. So, investors tend to look to precious metals as an effort to keep their investments safe. Here are the factors that move the precious metals market…
Supply & Demand – As with any other commodity, when gold and silver are in short supply, but high demand, the value climbs. Adversely, when demand is low and supply is high, we tend to see declines in value.
Economic Conditions – When the economy is thriving, we tend to see reductions in the value of gold and silver as investors feel safe investing their funds in traditional stocks. However, when economic conditions are poor, the price of precious metals tends to climb as investors hoard the metals as a way to protect their assets; ultimately reducing supply and increasing demand.
Market Conditions – When investors feel as though the stock market is overbought and nearing resistance that could lead to a major correction, we tend to see spikes in the value of precious metals as investors look to the safe haven.
While trading commodities traditionally may be a scary concept to the new comer, the idea of trading commodities through binary options is a great way to go for beginners. Not only can traders open trades with small amounts of capital, they also have better control over risk and loss exposure; all while being able to take advantage of the many opportunities for profit that come from price movements in the commodities market. So, what are you waiting for? It's time to start trading!