In spread betting, commodities are some of the most volatile and unpredictable products on which a trader can spread bet.
A wide variety of influences, from political developments to the weather forecast, can dramatically affect commodity prices in the spread betting markets. For this reason, it is vital that you understand commodities in detail before you start spread betting on them.
In their essence, commodities such as gold, oil and wheat are goods which are interchangeable in any part of the world.
For example, a barrel of crude oil would be worth the same whether bought in the UK or the USA. This is what sets commodities apart from products such as wine and cheese, which come in a variety of strengths, flavours, ingredients and so on, and consequently can vary greatly.
Why are Commodities so Volatile?
As with many other products in the financial markets, supply and demand force prices up or down, and the commodities markets are also significantly influenced by crop reports, weather forecasts, political announcements and seasonal factors.
What makes commodities even more challenging from a spread betting point of view is that, a lot of the time, the news affecting them tends to follow the price movement, rather than the other way around. This makes effective risk management a crucial element of commodities spread trading.
Risk Management and Commodities Spread Betting
Technical analysis can help you to assess just how volatile a commodity market can be before you risk any capital.
Analyse some historical charts to see how wide the price bands it moves through tend to be. You can also manage your potential downsides in commodity spread betting by using guaranteed stop losses. These guarantee to close your spread bet at a precise trigger value without limiting your profit potential, incurring a small premium for doing so.
Alternatively, some spread bettors - those starting out with a limited balance, for example - simply choose to avoid commodities altogether and instead focus their spread betting on less volatile markets such as equities or indices.
Whatever you choose to spread bet on, always make sure that you fully understand the risks beforehand.
Spread trading carries a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.
Article provided / approved by Finspreads which is a trading name of City Index Limited ('CI'), which is a spread trading and contracts for difference ('CFD') provider. CI is authorised and regulated by the Financial Services Authority, Firm Reference Number 113942.
iPhone is a trademark of Apple Inc. App Store is a service mark of Apple Inc.
'The Quick Guide to Spread Betting on Commodities' edited by DB, updated 09-Dec-10
A) Get free spread betting tips, offers, price updates, important news and more! All Free - Click here!
Risk Warning:
Please note that spread betting and CFD trading carry a high level of risk to your capital. You can lose more than your initial deposit. These products may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.
