Commodities are something that many traders feel comfortable investing in. This is because this asset is typically seen as being easier to understand. Since it deals with precious metals, crops, and oil, for instance, it is something that the average individual is more familiar with.In this guide you will learn how to start trading commodities with binary options.
Of course, this doesn’t mean that it is any easier to trade with or invest in commodities. Not to mention, there are some variances between the traditional methods of trading and using binary options to trade this asset. Let’s take a look at what is involved:
Of all of the assets, commodities are undoubtedly the most volatile. This means that you can expect the price of any commodity to fluctuate quite drastically, with just only a bit of notice. On the one hand, this could open up greater trading opportunities for the daring trader.
At the same time, you are also inviting more risk as it can be difficult to predict the direction of the price movement. A good way to get a handle on the situation would be to decide whether you are dealing with historical volatility or implied volatility. Since there are a number of factors affecting commodity performances at any given time, implied volatility is more likely. For commodities such as gold, however, historical volatility may be utilized.
Use Appropriate Indicators
Due to the uncertainty experienced with commodities, it is best to rely upon technical analysis. This will help to cut out some of the noise and focus on the period that you want to trade during. This type of analysis also tends to be more useful due to the shorter expiry dates.
In particular, Bollinger Bands are heavily relied upon during periods of volatility. They can aid in determining whether the market is going to hit a particularly rough patch.
Understanding the Impact of Supply and Demand
One of the things that you usually don’t have to consider with other assets is supply and demand. As commodities tend to be natural resources, they are in limited supply. Even if the resources are not exhausted, it can be difficult to achieve a volume that the market is typically used to. At the same time, you need to think about just how much people want a particular commodity given a certain situation. Gold is an excellent example.
This is because the demand for gold tends to rise when currency is devalued. However, the mines are not always able to keep up with this supply, limiting how much gold is available. This can cause the price of an ounce of gold to go even higher. Of course, the opposite situation can also occur with commodities. There can be a large supply available but no one really wants it.
External Factors Impacting Commodities
As mentioned, for the most part, technical analysis will help you steer the murky waters of commodities trading. Nonetheless, you have to understand that fundamental analysis also plays a role. This is because the weather, the geopolitical situation, and other factors can impact how commodities perform. In turn, this will determine whether or not the value of the asset will rise or decline. This is why it is important for you to always keep an eye on the news as well, as far as your commodity is concerned. For instance, if you want to place a trade with corn, you should be aware of weather patterns. In the event there is an unseasonable period, there may be lower supplies of the crop available. The market will then react accordingly.
These are the basics of trading commodities using binary options. You will need to first have full understanding over your asset as well as what influences the price changes before placing trades.