Soft commodities trading: key concepts
A financial instrument that is traded based on different metals, energy resources, or agricultural products is considered a commodity in the Forex market. Commodities can be divided into hard and soft varieties:
- Hard commodities are natural resources such as gold, oil, and rubber that are often mined.
- Soft commodities are agricultural products, which can include soybeans, cocoa, coffee, cotton, and sugar, as well as corn.
Soft commodities are usually traded in the Forex market without buying and selling physical products, but by acquiring ownership through, for example, commodity futures, which are also used by farmers who want to lock in future prices for their crops. Due to weather uncertainty, economic, political, or other risks associated with agriculture, this instrument tends to be more volatile than other assets. For example, weather and planting/yield reports can cause significant price fluctuations for grains and oilseeds, affecting contract prices differently depending on delivery times.
Traders can also purchase not only soft commodities futures but also trade CFDs, buy stocks of agricultural companies, or ETFs. Depending on the chosen instrument or method of working with soft commodities, this asset is traded on commodity markets, which include two segments:
- Over-the-counter Markets (OTC)
In the case of the OTC market, for example, traders can enter into CFDs, forward contracts, options, etc. through Forex brokers who organize market supply and demand and set prices accordingly. This type of trading is characterized by a quick and simple scheme for making transactions, a smaller initial deposit, and the possibility of using leverage.
- Commodity exchanges
The most popular type of transaction on the commodity exchange is a futures contract in which the seller undertakes to deliver the underlying asset to the buyer at a specified price and within a certain period of time. Of course, for the most part, the sellers of a futures contract do not ship the goods, and the buyers do not accept it, instead just on the day the contract expires, it is canceled and the purchase and sale are offset.
The largest stock exchanges in the world, where transactions on soft commodity assets are concluded, are:
- CME – Chicago Mercantile Exchange. The world’s largest trading platform with a high level of diversification of manufacturers and a huge turnover. The main commodities represented here include rubber, timber, fertilizers, cattle, meat, and a number of other goods from the category of soft commodities, that is, those that are grown, not mined.
- NYBOT – New York Board of Trade. The oldest commodity exchange in the United States, dealing primarily with agricultural products.
- TOCOM – Tokyo Commodity Exchange. Almost all groups of commodities are widely represented on it: from precious metals (gold, silver, and platinum) and oil to rubber, wool, cotton, etc.
The best soft commodities trading instruments
Trading soft commodities can be divided into two types: the physical delivery of goods, or through using commodity contracts like futures or derivative financial instruments like CFDs. Forex traders tend not to deal with real supplies and spend huge initial amounts of money entering the market, instead buying and selling their derivatives with leverage (it allows one to enter the market with minimal deposits and potentially increase returns).
Among Forex traders, the most popular soft commodity trading instruments include:
Forex commodity futures
One of the most common ways to trade soft commodities is to buy and sell futures contracts. The essence of the future is that the buyer undertakes to purchase the commodities in the future at a certain price, but it does not reach the actual delivery, since, on the day the contract expires, the purchase and sale are canceled and offset.
If a trader has bought a futures contract and the price of the commodity has risen and is trading above the original price of the contract when it expires, then he will make a deal. Before expiration, a buy trade will be offset or canceled by a sell trade for the same amount at the current price.
Commodity CFDs in FX trading
A Contract for Difference (CFD) in the price of a commodity is a financial instrument that allows you to trade any of the offered commodities without actually buying them, earning only on the price difference. The essence of the contract is that the positive difference between the opening and closing prices of a certain financial instrument is paid by the seller to the buyer, and the negative difference is paid by the buyer to the seller.
Trading CFD contracts allow even traders with a small initial deposit to enter the commodity market using margin leverage. As a result, he needs to cover only a small part of the cost of the open position, and the broker will cover the rest.
Stocks of commodity companies in the Forex market
Another option for trading soft commodities is to buy stocks of commodity-related companies. This option is not direct soft commodity trading, but it largely combines the advantages of dealing with goods and working on stock markets.
Traders point out that buying commodity stocks is relatively less risky than purchasing commodities directly since some companies may continue to have income even as commodity prices fall.
Commodity ETFs in FX trading
Commodity ETFs are a ready-made set of commodity stocks. Such funds pool the money of small traders and investors to create one large portfolio. The fund can also buy futures contracts or shares of various commodity companies. There is an opinion that commodity ETFs are relatively more accessible, and also have high liquidity. In the case of buying an ETF, a trader with little money has the opportunity to access a wide range of commodities without having to perform stock portfolio management tasks.
Soft commodities trading features in the Forex market
Assets of commodity groups can represent significant opportunities for traders, thanks to the features that distinguish them from other markets:
- Each of them has a real physical expression, and, accordingly, an economic value;
- Soft commodity pricing is as fair as possible and depends mainly on the balance of supply/demand;
- These assets can be quite volatile due to weather, economic and political factors and have fairly wide ranges of fluctuations in their prices. The right approach to building a trading strategy allows traders to get a higher return than in other segments;
- Mechanisms of reaction to inflationary processes differ significantly from other markets. As inflation rises, quotations on the commodity markets tend to grow, which makes it possible to receive additional income;
- A low correlation coefficient with the behavior of other markets allows traders to significantly expand the possibilities of diversification;
Forex soft commodity trading tips
Trading in soft goods is a great opportunity to diversify your portfolio, hedge possible risks, and also potentially earn on price fluctuations. At the same time, traders need to pay attention to the cyclicality and volatility of the market for a particular asset. You should also consider some other commodity Forex trading tips that will help you become a better trader, such as:
- Track the cyclical trends of commodities in the Forex market
As a rule, all commodities move in cyclical trends, which are related to seasonal cycles. For example, the price of soybeans tends to pick up after the fall harvest in the US, when demand starts to decline as stocks pile up. This trend often continues into the spring, when planting concerns begin to influence traders’ sentiments. With the right approach, seasonal fluctuations can be a powerful tool in the hands of traders.
Of course, seasonal fluctuations are not ideal for accurate forecasts, but they cannot be neglected, since this is the main fundamental factor in almost all commodity markets.
- Use volatility to your advantage
Each commodity has different levels of volatility, and experienced traders simply set a price range to trade the commodity, which will allow them to adjust their position size based on the level of price change and help determine appropriate take-profit levels.
- Check out the factors affecting the price of commodities
Before opening a position, check all the factors that may affect the value of the asset. The economic calendar and related financial news are the main sources of information when trading commodities. Pay close attention to global market sentiment.
- Follow trends
Trend following is an efficient and simple trading approach. As soon as the market begins to rise or fall, traders and investors immediately join this movement, and the more powerful the movement, the more participants join the process. To trade with a trend, you need to find an entry point, set risks, and receive income by fixing parts.
- Don’t forget risk management tools
It is vital to understand your personal risk tolerance before starting. The trading terminals of the best brokers usually have such risk management tools as stop-loss, take-profit, and trailing-stop that can help not only remove emotions from trading but also quickly close the position when the market turns against you.
- Work with a tried-and-tested trading strategy
In order to create your own trading strategy, you need to take into account seasonality, price fluctuations, trading indicators, and risk management tools, whether you are trading soft commodities or any other asset class. And before investing your own money, it’s better to test your ideas on a demo account to expand your experience before you start live trading.
Social trading of soft commodities
Trading in soft commodities may seem like a compound task for newcomers to the market, but quite lucrative due to the volatility and constant demand. In order to gain from professionals and save time on market analysis, the best brokerage platforms offer Social and Copy trading tools, the essence of which is quite simple: a trader does not bother with statistics, or analysis, and does not delve into the principles of indicators but simply copies the actions of gurus.
Also, during social trading, users exchange information with other members of the community online on special platforms. Traders post their strategies, chat, and put likes. Beginners watch the actions of professionals and then repeat their trades.
The world-famous broker, NAGA Markets, offers an automatic copy function through its platform to track and copy professional traders who are professionals in their field. The auto copy feature helps you reflect their trades, strategies, and actions in a couple of seconds, you just need to find the trader you want to copy and set the number of funds.
Another well-known Forex broker such as AvaTrade offers dedicated Social and Copy trading products such as Ava Social, Zulu Trade, and DupliTrade that help enhances the experience, interact with other members of the AvaTrade trading community, find mentors, ask questions, and, of course, copy the deals of the best market participants.
VPN for extra layer security in Forex commodities trading
Trading soft commodities, like other Forex assets, involves all sorts of sensitive information such as passwords, credit information, and personal data, therefore connecting through public Wi-Fi or insecure networks carries many risks of data leakage and hacking. In order to get reliable data transfer protection, many traders use Top VPN services that hide trading activity from prying eyes and your Internet provider, encrypt information with military algorithms, and maintain a high connection speed for fast transactions.
Click the button below to get one of the best VPN deals for Forex trading:
In addition, Forex VPN is not limited to one purpose only for trading: good VPN services have advanced functionality and provide the ability to unblock any streaming services that are not available in certain countries, allow you to download torrent files anonymously, and also bypass geo-blocking of popular games without delays or traffic spikes.
Top Forex brokers for soft commodities trading
Trading commodities has its own nuances and principles: these instruments are characterized by trend movements and volatility, therefore traders should make transactions based on Technical and Fundamental analysis to determine entry and exit points.
Also, before entering the real market, it’s better to test your ideas on a free brokerage demo account, the conditions of which are as close as possible to real ones.
It should also be noted that in the Forex market, a trader can open several accounts in order not only to select favorable conditions for each preferred commodity but also to try various derivatives and collect all kinds of Forex bonuses up to 100% on the first deposit.
Exness Forex trading
Exness is one of the most popular Forex brokerage companies with over 13 years of experience offering a wide range of trading instruments including currency pairs, stocks, indices, metals, energies, popular Cryptocurrencies like Bitcoin and Ether, and more rare coins.
The company has various market entry terminals such as the Meta Trader 1, MetaTrader 4, MetaTrader 5, or MetaTrader WebTerminal, and also provides a mobile app for iOS and Android to stay connected anytime, anywhere. In addition, those who wish to increase the speed can connect to a VPS server.
Among the presented accounts there are standard retail, and professional ones, as well as a demo for improving your skills and practicing your strategies.
Exness customer support is provided in 15 languages via online chat and instant messengers. Traders can deposit and withdraw funds through bank transfers; bank cards like Visa and MasterСard, Bitcoin, Tether, Perfect Money, NETELLER, WebMoney, and Skrill.
Exness is committed to transparency and is regulated by such reputable organizations as the FCA, CySEC, FSCA, FSC, FSA, and others. Try trading with Exness now using our dedicated button below.
eToro Forex trading
eToro is one of the largest international brokerage platforms that offer a wide range of assets including soft commodity CFDs on sugar, wheat, cocoa, and cotton. In addition to commodities, traders can choose stocks, indices, ETFs, currency pairs, and many popular Cryptocurrencies.
Clients can work on the broker’s own trading platform, which is available in two versions: in a personal account, as well as in the eToro app for Android and iOS. In the app, you can deposit and withdraw funds, trade, and candlestick charts, as well as copy trades and chat with other members.
Two types of Retail and Professional Client accounts are available for users, each of which has its own advantages: full access to all trading instruments and the CopyTrader tool with negative balance protection for the first and unlimited leverage for the second.
eToro also offers all its clients a free demo account with a $100 000 virtual balance to build their own portfolio and practice unfamiliar instruments and strategies.
The broker has millions of clients around the world and is distinguished by its reliability, which is supported by licenses from such international regulators as the FCA (UK), ASIC (Australia), and CySEC (Cyprus/Europe). Try trading soft commodities with eToro on favorable terms using our special button.
HF Markets Forex trading
HF Markets, formerly known as HotForex, provides access to the sugar, cocoa, coffee, cotton, and other markets through futures contracts and CFDs. In addition to commodities, traders can find another 1200 instruments, including Forex, energies, indices, ETFs, stocks, and bonds.
With a broker, you can open several types of Micro, VIP, Premium, Fix and Auto accounts with no commissions and a small initial deposit, and operate on the well-known MT4 and MT5 terminals which are available on desktop, web, and mobile versions for Windows, iOS, macOS, and Android. Also, HF Markets provides VPS service for stable connection and HFcopy trading platform to subscribe to experienced traders and follow them.
HF Markets is mainly regulated by such reputable and well-known bodies as CySEC in Europe, FCA in the UK, FSCA in South Africa, DIFC in Dubai, and SFSA in Seychelles, allowing it to provide its services worldwide. The company holds various promotions and seasonal offers, which you can get by clicking the special button below.
XM Group Forex trading
XM Group is one of the trusted brokerage companies offering over 1000 financial instruments that can be traded on MT4/MT5 platforms, including Forex, CFDs for stocks, commodities (cocoa, coffee, corn, cotton, soybeans, sugar, wheat), indices, precious metals, and energy.
Traders are free to choose multiple types of accounts with negative balance protection and tight spreads: Micro, Standard, XM Ultra Low, and Shares. Beginners can start with a demo account that exactly repeats all the functions of real ones to gain experience and start trading live soon.
XM Group is regulated in several jurisdictions, including ASIC, CySEC, IFSC, and DFSA. The broker also has a very attractive bonus program of 100% for the first deposit and provides the opportunity to connect to a virtual private server (VPS). You can try trading with XM Group and get a special offer from TopForex.trade by clicking the button below.
NAGA Markets Forex trading
NAGA Markets is a world-famous broker that offers classic trading and social trading in over 750 instruments including currency pairs, CFDs, Cryptocurrencies, indices, commodities, ETFs, and futures as well as real stocks commission-free through a multi-currency account.
To enter the Forex market, traders can use the popular trading platform MetaTrader 4 and its newer version MetaTrader 5, as well as the company’s own development – the NAGA web platform with mobile applications. Also, one of the main advantages of the NAGA offer is the possibility of social trading, that is, automatic copying of trades of professionals.
Among the accounts, market participants can find unlimited demo accounts, real, Professional, as well as VIP. Depending on the number of funds on the account, you get a trader’s level, bonuses, and discounts.
NAGA clients can top up their trading account by bank transfer, using payment cards, through the electronic payment systems Giropay, Skrill, Neteller, PaysafeCard, and Klarna, as well as using Cryptocurrencies (Bitcoin, Ethereum, Dash, Litecoin, Bitcoin Cash, and NAGA Coin).
The company has received licenses from proven and trusted regulators such as the FCA and CySEC. Try trading with NAGA and get a special offer from TopForex.trade by clicking on the button.
AvaTrade Forex trading
AvaTrade is one of the largest brokerage platforms where market participants can trade popular soft commodities such as corn, coffee, soybeans, sugar, cocoa, cotton, and others on favorable terms with leverage of up to 10:1. In addition to agricultural production, traders can choose from over 60 currency pairs; CFDs on almost all underlying assets, including commodities, stocks, indices; more than 100 stocks; Cryptocurrencies like Bitcoin, Litecoin; metals; and energy commodities.
AvaTrade provides access to a wide variety of platforms that are available to all traders, including MetaTrader 4/5, WebTrader, AvaOptions, and AvaSocial – a CopyTrading platform, AvaTradeGo, and Auto Trading – platforms for automatic trade, including ZuluTrade and DupliTrade. The AvaTrade platforms are also available on mobile devices for iOS and Android.
AvaTrade has a very formidable regulatory base and is licensed by such institutions as IIROC, BVIFSC, FSCA, ASIC, ADGM, FSA, and FFAJ. Test the capabilities of various AvaTrade trading platforms and start buying and selling on favorable terms by clicking the button below.
Soft commodities trading in the Forex market - FAQ