Why Trade Agricultural Commodities?
According to the Food and Agricultural Organization of the United Nations, the economic value of the agriculture industry is worth more than $3 trillion in total (View Source). As a trader, you can take advantage of this growth by trading different kinds of commodities in agriculture.
The history of agricultural commodities trading can be traced back to the early days of mankind. Compared to other commodities, the demand for agricultural produce is quite high.
While it may not be as dominating as the FOREX market, there are a number of players in the industry. The common agricultural commodities futures exchanges include the Chicago Board of Trade, Intercontinental Exchange, New York Mercantile Exchange, Chicago Mercantile Exchange, and so on. These futures exchanges handle massive contract sizes.
In this comprehensive article, we will explain what agricultural trading involves and the different types of commodities you can trade. We will also explain the different trading styles as well as some strategies to use.
What is Agricultural Trading exactly?
Agricultural trading is the act of buying and selling agricultural commodities. While this can involve physical trading of the goods, in the case of retail traders, it happens through futures contracts and shares and indices.
There are several agricultural commodities you can trade at top brokers, such as cotton, corn, wheat, coffee, cocoa and so on. By trading these commodities, you are speculating on their prices to either go up or down.
There are many reasons why you may want to consider trading agricultural commodities. First, different innovative technologies are created for efficient farming, which can affect the price movement. Apart from that, weather fluctuations are unpredictable and affect agricultural commodities, thus making it attractive to traders.
Choose a Broker & Open an Account
To start trading agricultural commodities, you need to choose a licensed broker. There are numerous brokers in the industry, but they differ in terms of the quality of service offered. As a result, you need to consider a few factors before deciding which licensed broker to use.
First, you should ensure that the broker has top-notch security mechanisms to protect your trades and is regulated by an appropriate authority. Apart from that, you should look at the trading platform provided to see if you have access to easy-to-use technical and charting tools. You can check out some of our licensed brokers, who have been fully vetted and are known to deliver the best service to traders.
Buying agricultural commodities
There are several agricultural trading instruments such as contracts for difference (CFDs), options, futures, shares and indices. To buy agricultural commodities, you need to first fund your trading account using one of the payment methods that your broker supports.
Once you have money in your account, check the list of agricultural markets available and choose the commodity you wish to trade. You can then click on the “Buy” button and specify the number of units you want to purchase and the product type, as well as the order type (whether it’s a limit order or market order).
Once you are through setting these values, you can proceed to confirm the transaction and complete the purchase.
As with other markets, brokers offer traders leverage when trading agricultural commodities. Leverage can be considered as borrowed funds from a broker, which you can use to increase your exposure to the market and trade amounts that are higher than those you actually have.
In other words, leverage can help you take on a greater position when trading agricultural commodities, but it also comes with risks. For instance, if you use a leverage of 1:10, it means that you can make 10x profit. However, it also means that if the trade goes south, then you will end up losing 10x more. Thus, it is essential that you plan your trades and make use of a good strategy.
In agricultural commodities trading, you make a profit if your closing position is better than your entry position. If you are trading agricultural commodities as futures, then you make a profit when the price of the commodity is higher than the price that you bought it for at the start of the trade.
For example, if you bought corn at $100 a unit and you were able to sell it at $150 when the contract matures, you’ve made a profit of $50. Most brokers allow traders to extend the maturity date of agricultural commodities trade. However, doing so comes with a rollover fee, which is deducted from your account, and this fee varies from one broker to another.
Tips to Trade Agricultural Commodities
Starting agricultural commodities trading is similar to starting a business, so you need to be equipped with the right information that can help you with your decisions.
If you’re new to trading, you may want to start by using a demo account. Numerous brokers allow users to create a demo account, which can provide them with valuable insight into the trading process. Once you are confident about your trading skill and strategy, you need to have a budget for trading.
Before you enter any agricultural commodities trade, it is important that you carefully analyse the market and not to get carried away by chasing profits unless you can afford to. If you are a beginner, it’s also advisable to focus on one commodity at a time.
Pick an agricultural trading style and strategy
There are four main trading styles that you can choose from when it comes to agricultural trading. These are day trading, scalping, position trading, and swing trading.
- Day trading involves entering a trade and closing it the same day. It is suitable for traders that do not like to monitor trades for too long.
- Scalping is a rapid trading style where you enter and close a trade in a few seconds or minutes.
- As for position trading, it does not have much to do with the day-to-day fluctuations of contract prices, as it spans a longer period such as weeks or months.
- The swing trading style involves buying or selling commodities as price volatility sets in.
Besides choosing the trading style that best suits you, you also need to have a trading strategy. However, you should be aware that agricultural commodities trading is quite different from FOREX or stocks, so the same strategies may not apply.
The agricultural commodities market has its own behaviours which you need to consider. It’s important that you find your niche market and master it. For instance, if you prefer trading cotton, then focus on only that market. A common strategy that traders use is the Trend-Following strategy, where you follow the movement of the prices based on the interaction of supply and demand. You should also use trading indicators such as the commodity channel index when analysing markets.
Set your stops and limits
As with FOREX trading, it is essential that you set stops and limits when trading agricultural commodities to have better control of the trade. You can set a stop loss (SL), which is a price limit below your entry price at which the trade is closed automatically to help avoid taking more losses.
You can also set a take profit (TP), which is a price limit above your entry point where you want the trade to close automatically and take your profit. Most brokers allow traders to use a special type of stop loss known as the trailing stop loss order, which automatically pushes the stop loss value up when the price moves in your favour.
As with all types of trading instruments, you can make or lose money when trading agricultural commodities. This explains the need for setting stops and limits that we discussed in the previous paragraph. The prices of agricultural commodities can be affected by several factors such as weather conditions, economic and demand-related patterns, seasonality, government policies and so on. Thus, you need to anticipate these risks before you proceed to select a market to trade.
There are also marginal or leverage risks that can cause you to lose most or all of your money. However, having good risk management as well as realistic expectations when trading agricultural commodities can help you minimise your risks.
So far, we’ve explained all the essential things that you should know when trading agricultural commodities. Remember that there are different types of agricultural commodities that top brokers, such as those listed on our site, offer traders. When choosing a broker, make sure you go for a licensed one that is trusted in the industry.
We’ve also discussed how leverage works in agricultural commodities trading, and why you need to be extra careful when using it. Do not forget that to become a good commodities trader, you need to have a trading style and strategy. You should also make sure that you use stops and limits to help you have better control of your trades.