Beginner’s Guide to Spread Betting Commodities

Commodities are among the most popular assets to spread bets on due to their volatility and potential for large price swings. They are raw materials or primary agricultural products that can be bought and sold, such as gold, oil, natural gas, wheat, corn, and cocoa. 

Explore everything you need to know to spread bet on commodities successfully with this insightful article. You will learn to analyse the markets, choose a commodity, implement trading strategies, and maximise your trading success.

Choosing a commodity to spread bet on

With countless commodities to choose from, deciding which one to spread a bet on can seem overwhelming initially. Doing thorough research is key to selecting a commodity you feel comfortable analysing and predicting price movements. 

Here are some factors to consider:

Production levels - Look for commodities with stable or growing production output. Any major disruptions to supply, like facility closures or resource scarcity, could cause increased volatility. Understand which regions, companies and infrastructure are vital to production flows.

Supply and demand dynamics - Have a firm grasp of the commodity’s current supply and demand picture, along with projected changes looking forward. Rising demand against constrained supply will bid prices higher. New sources of demand, like emerging market growth, could lead to upside price shocks.

Inventory levels - Rising inventories typically signal oversupply and cause downward price pressure. Falling stockpiles indicate growing scarcity that could spur prices upwards.

Market conditions - Consider the broader economic conditions influencing a commodity. Strong industrial activity, manufacturing growth, construction booms and consumer demand can stimulate the consumption of raw materials and fuels. Recessions and slowing growth conversely dampen prices.
 

Consider giving this a look: Inflation And Recession - Can You Have Both?

Weather conditions - Agricultural commodities are highly dependent on weather conditions. Droughts, floods, cold snaps or hurricanes can have a severe impact on production yields, facility operations and supply chains. Therefore, it is important to understand the growth seasons for different crops and forecast the weather impacts during those periods. 

Seasonality trends - Many agricultural commodities demonstrate seasonal pricing patterns as supply and demand fluctuate at different times of the year. Know when peak and low seasons typically occur, and try to spread betting commodities on these seasons accordingly.

Geopolitical factors: Political instability, conflicts and sanctions in commodity-producing regions can greatly disrupt supplies and cause spikes in volatility. Events like OPEC policy shifts, Middle East tensions and South American political crises can rattle commodity markets.

Some of the most actively traded commodities for spread betting include:

1. Gold

The ultimate haven asset with high liquidity makes gold popular for spread betting commodities. Keep informed on factors like inflation, central bank policies, emerging market growth, and political/economic crises that drive gold prices.

2. Oil

As a core industrial and transportation fuel, oil price gyrations impact economies globally. Monitor crude inventories, OPEC supply quotas, geopolitics, alternative energy adoption, and demand growth when spreading betting oil.

3. Natural Gas

Weather patterns, inventory levels, energy demand, and production rates impact natural gas volatility. Understand these dynamics before spread betting natural gas prices.

4. Coffee

Extreme weather events, harvest yields, global stockpiles, and currency swings in top producer countries like Brazil and Vietnam can precipitate big coffee price moves to capitalise on.

A thorough research on commodities and being informed on the factors that drive their prices can make you feel more confident when choosing and predicting future price movements. This will set you up for success in spread betting commodities. Always start slowly with small positions as you hone your spread betting skills.

Read this article for more insights: How To Trade Or Invest In Gold: A Beginner’s Guide

Getting started with commodity spread betting

Once you’ve chosen a commodity to focus on, it’s time to set up an account with a spread betting broker and learn the basics of placing trades. Here are some steps for spread betting commodities:

Selecting a broker and setting up an account

1. Find a reputable spread betting broker that offers your target commodities. Compare factors like regulatory compliance, trading platforms, leverage amounts, commissions and fees.
2. Opening a demo account first is highly recommended to practice with virtual funds before going live.
3. Deposit initial capital to trade with real money. Remember, with spread betting, you only need a small margin deposit.
4. Ensure you understand order types like stopping losses and taking profits to manage risk. Start small with position sizing.

Strategies like going long vs short, speculation vs hedging

One of the advantages of spread betting is the ability to profit whether commodity prices rise or fall. Two main approaches exist:

Going long - If your analysis suggests prices will increase, you would take a long position by buying the spread bet. You profit for every point the price trades above your entry level. 

Going short - If you forecast prices will decline, you would take a short position by selling the spread bet. You profit for each point the price drops below your entry. 

Both long and short strategies can reap big rewards if appropriately timed. Be flexible, and don’t get anchored to one side of the trade.

Speculating aims to profit directly from anticipated price moves in either direction. You are betting purely on volatility without owning assets. This is the most common spread betting approach.

Hedging offsets potential losses in a commodity you already have exposure to, such as a producer hedging production costs. Spread bets can hedge existing commodity holdings or shares in producers.

Given the propensity for sharp reversals in commodity markets, be nimble and don’t stay in a position if the situation (price factors) changes. Set stop losses to protect capital, and don’t be afraid to reverse direction quickly. Commodities can swiftly change course as market conditions evolve.

Using long and short strategies, hedging and speculating allows trading opportunities whether prices trend up, down or sideways. Adapt strategies based on your market analysis.

Analysis methods and tools

A detailed analysis of your chosen commodity is crucial to gain an edge in spread betting its price movements. Two main approaches are fundamental and technical analysis.

Fundamental analysis considers all the core supply and demand factors, economic trends, political events, weather impacts, and other variables that may cause commodity prices to rise or fall. For example, understanding production costs, inventory stockpiles, economic growth projections, geopolitics of key producing regions, and weather patterns can all impact fundamentals.

Stay informed on news, earnings reports, seasonal trends, and global developments that could cause commodity price volatility. Resources include financial websites, commodities-focused publications, economic calendars, and social media feeds of experts.

Technical analysis utilises historical price charts, indicators, and patterns to identify trading opportunities. Studying how prices have moved in the past can help forecast future movements. Useful technical indicators for spread betting commodities include:

1. Moving averages - Plotting simple, exponential or volume-weighted moving averages onto price charts helps identify support and resistance levels. Moving averages also reveal directional bias and momentum. When shorter-term averages cross above longer-term averages, an uptrend is signalled.
2. Relative Strength Index (RSI) - The oscillator indicates overbought conditions above 70 and oversold conditions below 30. As RSI moves into these extremes, it signals potential exhaustion points useful for timing entries and exits. You can go long on oversold readings and short on overbought conditions.
3. MACD - The Moving Average Convergence Divergence indicator identifies changing momentum by tracking the gap between short and long-term moving averages. Crossovers in MACD from positive to negative territory often precede trend changes.
4. Bollinger Bands - Bollinger Bands plot standard deviation levels above and below a simple moving average. During high volatility periods, the bands widen. When volatility declines, the bands contract. Expansions in the bands highlight potential trading opportunities.
5. Fibonacci retracements - Key Fibonacci ratios of 23.6%, 38.2%, 50%, and 61.8% drawn from significant swing highs to lows reveal potential support and resistance levels where reversals may occur. These are useful for placing stop losses.

Using these indicators together provides powerful insights into emerging trends, momentum shifts, overextensions in price, and impending reversals. Mastering technical analysis is vital for timing profitable entries and exits in fast-moving commodities.

Many spread betting brokers provide sophisticated trading platforms with live pricing, interactive charts, news feeds and customisable indicators. These enable you to conduct technical analysis anywhere and react quickly to trading opportunities.

As a final thought,

Spread betting on commodities certainly offers immense profit potential thanks to their volatility, but it also carries substantial risk if proper precautions aren’t taken. The leverage involved means both gains and losses can be dramatically amplified. Be sure to only risk capital you can afford to lose and use stops to contain drawdowns. Start small to hone your analysis skills and learn the nuances of each commodity market. Never overleverage your account or deviate from your trading plan based on emotions. 

Education, discipline and continuous learning spread betting commodities can become lucrative. Approach it with prudent money and risk management every step of the way.
 

Spread bet popular commodities on markets.com 

Spread betting is available on our trading platform based in the United Kingdom. We also offer a contract for difference (CFD) trading option. You may be wondering about the difference between spread bets and CFD contracts. Spread bets have fixed expiration dates when placed, and CFD contracts have none.

Whether you are a seasoned trader or just starting, our platform is designed to support your goals. We provide personalised guidance every step of the way through live chat, so you’ll never have to navigate the markets alone. Our team of experts is available around the clock to answer questions, offer strategies, and help you become the best trader you can be. Trade with confidence, knowing we’ve got your back.

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When considering “CFDs and Spread Betting Commodities” for trading and price predictions, remember that trading CFDs and Spread Betting involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”