Bonds are one of the most popular financial assets, but if you’ve never explored what they are and how bonds work, you may have been put off by their reputation for being complex or a low-reward asset. 

In reality, bonds are a widely traded asset that can strengthen your portfolio’s risk return profile and add diversification without exposing yourself to excessive volatility. Their supposed low reward is balanced by being a low-risk, safe option for investors, and their inverse relationship to interest rates also offers some profitable opportunities for trading bond CFDs. 

In this article, we’ll break down what bonds are, what kinds are available for trading and how you can add this asset to your own portfolio, diversifying it beyond just stocks. 

What are bonds?

Bonds are, in the most simple terms, a type of debt instrument. Whereas individuals might approach a bank or credit union for a loan, companies and governments can raise capital by going to investors, who become bondholders in the organisation. Bondholders pay interest on the asset, known as a coupon rate, until the maturation of the bond — ‘maturity’ here being the due date when the initial loan amount (known as the principal) is repaid. 

Bonds are considered lower risk than other more volatile assets, but they do carry some risks associated with interest (coupon) rates, credits, defaults and prepayments. There are different types of stocks depending on what organisation, company or institution has issued it, but all are rated for their investment grade. 

What type of bonds are there?

Bonds can be both secured or unsecured. A secured bond protects the bondholder from the issuer defaulting on the loan, by pledging assets as collateral. Mortgage-backed securities are one example of a secured bond. 

Unsecured bonds, on the other hand, are not backed by any collateral. They are also known as debentures and are considered riskier assets because both the interest paid and principal are only guaranteed by the issuing company or organisation.

There are four kinds of bonds: 

• Government bonds — While some government-issued bonds are unsecured, they are considered to be some of the lowest-risk investments on the market, when the bonds are from stable governments that have never defaulted on a bond debt. In the US, government bonds are known as Treasuries, while in the UK, they are called gilts.
  
  Government bonds can be made available on both a fixed interest rate and with a variable coupon repayment that is tied to inflation. In the UK, inflation-linked bonds are called index-linked gilts, while in the US, they are called Treasury Inflation-Protected Securities or TIPS.
  
• Corporate bonds — Corporate bonds, as their name suggests, are issued by corporations. They’re used to raise funding for companies and, depending on the size and established nature of the company, they may be considered higher or lower risk.
  
  Corporate bonds are always higher risk than government bonds, but as a bondholder, you are afforded more protection from loss than an ordinary shareholder. For example, if the company goes bankrupt, liquidated assets are used to pay bondholders ahead of shareholders (this is known as a liquidation preference). Corporate bonds may be secured, and they are rated by agencies like Standard & Poor’s, Moody’s and Fitch Ratings, which assess their overall investment grade.
  
• Municipal bonds — Similar to government bonds, municipal bonds, or munis, are issued by municipalities, councils, cities and other local governments. They often have a lower interest rate and are considered less risky than certain other types of bonds.
  
  Municipal bonds may also be appealing to investors because they do not attract tax in the US.
  
• Agency bonds — Agency bonds are defined as securities, which are issued by government-backed enterprises or other federal government departments than the US Treasury. Largely a US phenomenon, they may be backed by the US government, as with the case of government department issued bonds, or not, as with those issued by government-sponsored enterprises (known as GSEs).
  
  Both the Fannie Mae National Mortgage Association and the Freddie Mac Federal Home Loan Mortgage bonds are examples of GSE bonds.

How do bonds work?

Bonds are simple debt instruments. They govern the process by which a bondholder loans money (known as the principal or face value) to a public or private institution (known as the issuer), and the issuer then repays this on an annual, semi-annual or monthly basis, as outlined in the terms of the bond. When the bond reaches maturation — its expiration date — the principal is returned to the bondholder. 

Because bonds are what’s known as negotiable securities, they can be bought and sold in a secondary market, in much the same way stocks are (although it should be noted that stocks and bonds function quite differently). Some bonds are listed on the stock exchange; however, most bond trading occurs through the use of OTCs (over-the-counter products) like CFDs (contracts for differences), which are traded through brokers. 

Like all debt instruments, bonds are heavily dependent on interest rates to determine their price. In general, interest rate hikes reduce the demand for bonds, as investors seek better interest rates elsewhere. In periods of decreased interest rates, the demand for bonds inversely increases, and their prices will rise. 

Bond characteristics

There are certain characteristics that set bonds apart from other assets and debt instruments. These are: maturation and duration, credit rating, face value and issue price and coupon rates and dates. 

• Maturity and duration — These two terms might sound interchangeable, but maturity and duration are actually different. The maturity of a bond refers to its active term, i.e. the length of time until it expires and its final payment is made.
  
  Duration, on the other hand, refers to both a period of time and a measure of a bond’s price sensitivity to changes in the interest rate. The Macaulay duration of a bond is the actual amount of time it takes to repay its principal, expressed as a number of years. The Macaulay duration is used to calculate a bond’s modified duration, because the longer a bond takes to pay off, the more vulnerable it will be to fluctuations in interest rates. The modified duration is the expression of that bond’s vulnerability.
  
• Credit rating — A credit rating essentially ‘grades’ all bonds on a scale of creditworthiness. As mentioned, ratings agencies are the bodies that produce these ratings — Standard & Poor’s and Fitch Ratings, for example.
  
  Credit ratings are useful to issuers because they can help to advertise a bond’s attractiveness to investors. Likewise, they are a valuable tool for assessing the risk of a bond for potential bondholders. Low-risk long-term bonds are given the highest possible AAA rating, while bonds assessed to be below investment grade are rated from BB+ (these are also known as junk bonds).
  
• Face value — The face value, or principal, is the amount an issuer agrees to pay to the bondholder, less any coupon (or interest) rate payments. Usually, the face value is paid at a lump sum at the expiration of the bond and doesn’t fluctuate in price from when it is initially set. There are some exceptions to this, such as TIPS (Treasury Inflation-Protected Securities), which are adjusted in line with inflation figures.
  
  Issue price should theoretically be the same as a bond’s face value, because both represent the full value of the loan. Where the issue price can differ, however, is on the secondary market, where the issue price of a bond can fluctuate significantly.
  
• Coupon rates and dates — The coupon rate, or interest rate, of a bond is the interest paid to bondholders, usually on an annual or semi-annual basis. It is also known as the nominal yield. The coupon rate is calculated by dividing the annual repayments of the bond by its full face value.
  
  Coupon dates govern the intervals at which these coupon payments occur. They can be monthly, semi-annually, annually or quarterly, but will be specified by the bond. 

What affects the prices of bonds?

The prices of bonds are subject to demand and supply, inflation rates, their credit rating and how close a given bond is to maturity. As we’ve discussed, bonds and interest rates have an inverse relationship to each other — when the price of one is high, the price of the other will be lowered. Demand for bonds is therefore dependent on interest rates and whether bonds represent an attractive investment because they are low or whether higher interest rates will tempt investors with better opportunities. If interest rates become too high, issuers may reduce the number of bonds on offer, in order to curb supply in line with demand. 

Credit ratings remain a strong indicator of a bond’s overall risk, and cheaper bonds will usually carry with them more risk of defaulting. It’s up to a trader how they decide to manage this risk, but credit ratings agencies remain a good guide for which bonds represent good investments. 

As a bond matures, its price will naturally return back to its face value, as the value of the bond reaches its initial loan amount. The number of coupon payments remaining on a bond will also affect its price. 

How do you trade bonds? 

Now that you know the ins and outs of what bonds are and how they work, it’s time to cover how to trade bonds. 

1. Choose the kind of bonds you want to trade. 

Both government bonds and corporate bonds are viewed as important elements of a diversified portfolio. Whichever of these bond types you choose to trade, a popular way to do so is with bond CFDs. CFDs are financial derivatives that work by deriving their value from speculation on the movement of a bond’s value, rather than relying on taking possession of the bond itself.

2. Pick your bond trading strategy. 

Bond CFDs, like all CFDs, are complex financial instruments. There are two broad approaches to bond trading strategies that you can take, but you can also do more research on other CFD trading strategies. 

The first strategy for trading bond CFDs is known as hedging. This is a loss mitigation tactic that involves trading in such a way that your gains and losses offset one another.

The second strategy is interest rate speculation. By correctly predicting the movements of interest rates, you can take a position on government bond futures via bond CFDs.

3. Open a bond trading account. 

You’ve decided on a bond CFD and a strategy; now you’re ready to get trading. To do so, you’ll need to create a live trading account. At VT Markets, you can do so in just a few minutes. If you want to practise your strategy before jumping into the live market, you can also create a risk-free demo account to put your approach through its paces.

4. Take your first position. 

Finally, you’re now ready to open and monitor your first position. Make sure you have the best trading platform at your fingertips. At VT Markets, we use the powerful MetaTrader 4 and its next-gen counterpart, MT5. 
Looking for more trading advice and tools? Feel free to contact our team today.

This week’s key economic indicators, including the US Jobs Report and Canada’s Gross Domestic Product, are in the spotlight for the financial sector. These fundamental reports are crucial for traders to navigate the markets and make informed decisions. Stay tuned for the latest updates.

Australia Consumer Price Index (31 May 2023)

The monthly Consumer Price Index in Australia increased 6.3% in the year to March 2023, slowing from a 6.8% rise in the year to February 2023.

The data for April 2023 will be released on 31 May, with analysts expecting a further slowdown, dropping to 6%.

Canada Gross Domestic Product (31 May 2023)

The Canadian economic activity in February edged up by 0.1%, following a 0.6% expansion in January.

For March 2023 data, set to be released on 31 May, analysts expect a 0.1% decline.

US JOLTS Job Openings (31 May 2023)

The number of job openings in the US dropped by 384,000 to 9.6 million in March 2023, the lowest level since April 2021.

Data for April 2023 will be released on 31 May, with analysts expecting another drop to 9.2 million.

US ADP Non-Farm Employment Change (1 June 2023)

Private businesses in the US created 296,000 jobs in April 2023, a significant increase compared to the downwardly revised figure of 142,000 in March 2023.

May 2023 data will be released on 1 June, with analysts anticipating a job creation figure of around 200,000.

US ISM Manufacturing PMI (1 June 2023)

The ISM Manufacturing PMI in the US rose to 47.1 in April 2023, up from a three-year low of 46.3 in the previous month.

Analysts predict that the index for May 2023, scheduled for release on 1 June, will be at 48.

US Jobs Report (2 June 2023)

The US Non-Farm Employment Change unexpectedly increased by 253,000 jobs in April 2023, outperforming the expected 180,000 and coming after a downwardly revised 165,000 in March. Concurrently, the unemployment rate in April 2023 dropped to 3.4%, matching a 50-year low previously seen in January.

For May 2023 data, scheduled for release on 2 June, analysts anticipate that Non-Farm Employment will see an addition of 180,000 jobs, with the unemployment rate projected at 3.5%.

Stock indices are one of the most important elements of the global financial system. They represent the overall performance and trends within a specific country’s economy, and can also give a strong indication as to the state of the global economy as well. 

If you’ve ever wondered how indices trading works, what these indices represent in particular or how to understand what moves their price, read on to discover more in our in-depth guide.

What are indices? 

Indices are numbers which represent the top performing shares from a particular stock exchange. It’s a financial instrument which essentially gives a snapshot of an exchange’s major players, averaging out individual stock movements and distilling a huge amount of financial activity into just one figure.

Some of the largest indices in the world are:

• Dow Jones (in the US)
• Nasdaq (US)
• S&P 500 (US)
• DAX (in Germany)
• CAC (in France)
• FTSE (in the UK)
• Hang Seng (in Hong Kong)
• Nikkei (in Japan), and;
• ASX (in Australia) 

Indices can be calculated in two different ways; some take the performance of their  largest companies into account, a method known as a market capitalisation-weighted average. This is the case for the S&P 500, the FTSE and the ASX; the stock movement of companies worth the most on these exchanges have more sway over the index as a whole. Most stock indices use this method, however some are calculated using a price-weighted average. Both the Dow Jones and the Nikkei use this method, where shares that command higher prices also command more influence. 

Because indices represent the bundled overall stock value of the best performing company stocks or highest value stocks on a given exchange, rather than just the performance of one particular share, they can be more volatile than a single company’s stock. This volatility provides traders with both more opportunity, but also an increased risk. 

What is index trading?

Because an index is simply a number representing the performance of a group of shares on a particular exchange, you can’t buy and sell (i.e. trade) them directly. Instead, you need to choose to trade a product which mirrors their performance. 

Index trading therefore is trading products that do this, which include: 

• Index funds
• Exchange traded funds (ETFs)
• Futures
• Options, and;
• Contracts for differences (CFDs)
  

All of these products track the price of the underlying index, but not all require you taking ownership of that underlying asset directly. Instead, as a trader, you’ll speculate on whether you think the price of indices will rise or fall in any given period, and open or close positions accordingly. 

What moves the price of indices? 

There are a number of factors which can lead an index to rise or fall in price. In order to learn how to trade indices, you’ll need to be aware of and monitor these factors. 

• General economic news — Because price indices summarise the performance of multiple companies’ stocks, they are often seen as an indicator of an economy more generally. Likewise, economic news will affect their performance.
  
  Announcements by major banks, changes to investor sentiment, economic events, trade agreements, changes to employment figures and more can all cause a price index to rise or fall.
  
• Global news — Even within local price indexes, multinational corporations will be affected by global news events. Unexpected events like pandemics or natural disasters will create movement within an index, as can increased commodities prices, supply chain disruptions, global economic turmoil and conflicts.
  
• Company financial results — The performance of individual companies within an index will have a knock-on effect within the index as a whole. This is particularly true if the company is more highly valued or if its stock price is trading at a higher amount. In these cases, posting a major profit or loss will also have serious ramifications for the index price.
   
• Company announcements — Company announcements have big potential consequences for the future of that corporation. From leadership changes to mergers, updates to manufacturing or employment practices and restructures, the internal workings of individual companies will have broader implications for their stock price and therefore the index price.
  
• Index composition changes — Which companies make up an index will obviously make a difference to its overall price. The addition or removal of a company from an index will require traders to re-examine their positions.
  
• Commodity price fluctuations — Some indexes are made up of both company and commodity stocks, for example the London Stock Exchange’s FTSE. Any fluctuations in these markets can potentially shift the index price accordingly. 

How do you trade indices? 

When trading stock indices, it’s important to do your research, gain a good understanding of the product you’ve chosen to trade and to put into place the right risk management strategies. Of all the index trading products, one of the most popular is index CFDs. As we’ve mentioned, some financial instruments (like futures), require you to eventually take possession of the underlying asset, while others are purely speculative. Index CFDs are an example of a speculative financial instrument; they give you opportunities to profit from both rises and falls in a price index, by correctly predicting in which direction the overall price will move.

In general, there are two ways you can approach trading indices via CFDs: going long and going short. Going long refers to buying index trading products, because you think the price will rise. Going short means selling or closing your positions, because you expect the market to fall in price. 

Whether you decide to go long or short, your overall profit or loss when trading index CFDs will be determined by how accurate your prediction was and the overall size of the market’s movement. 

Leverage and index CFDs

The way CFD trading works is through leverage. If you’ve never used leveraged trading before, it’s important to understand how this differs from other types of trading. Leveraged products only require a small initial deposit in order to open a position – an amount known as a margin – which is calculated as a percentage of the overall actual value. 

Leveraged financial products may require less capital to give you exposure to a larger market, but it’s vital to remember that both losses and profits from index CFDs are calculated on the total value, not the percentage value of the margin. In practice, this means that it’s possible to incur a loss greater than your initial deposit. 

There are many strategies and approaches when it comes to how to trade CFDs, so you should carefully examine the particular CFD you’re interested in trading, and decide which strategy is best suited to your portfolio.

How to start trading indices

Once you’ve decided to trade indices, you’ll need to follow a few steps to get started operating in live markets. 

1. Decide what trade method you want to use — VT Markets offers traders the chance to trade indices CFDs, which allows you to identify opportunities to profit from both rising and falling prices.
   
2. Choose between cash indices and index futures — Generally, cash indices are favoured by day traders for their tighter spreads and on the spot trade pricing, while index futures take a longer term view, and incur less overnight funding chargers for traders looking to hold a position for a longer time span.
   
3. Create an account and log in — When you’re ready to go live, creating a live account with VT Markets only takes a few minutes.
   
4. Select the index you want to trade — Choose from the most popular global indices based on the available analysis and market insights.
   
5. Decide whether to go long or short — Remember, taking a short position means speculating on a decreasing index value, and going long predicts rising values for the index. Both can be the right call to make, depending on the overall outlook for a given economic sector or domestic market.
   
6. Set up risk management strategies — VT Markets offers our clients various automatic tools to prevent you from incurring losses you can’t afford. Stop-loss orders and limit orders are risk management tools you can use to ensure your position isn’t compromised by more or less favourable market prices.
   
7. Open your first position — See an opportunity? Seize it by opening and monitoring your first position. With trading tools and expert analysis from VT Markets, you can closely follow the market, closing out your position at the right time to maximise your profit or cut a loss. 

Diversify your portfolio and hedge your risk with VT Markets

As a full service online trading broker, VT Markets can connect you with the tools and powerful platforms you need to manage your trade positions, diversify your portfolio and manage your risk. Looking to trade Forex, or wondering which trading strategy is right for you to get started with? Get in touch with us today, or make a deposit and start trading your positions with expert market insights. 

FAQs

What are the best indices to trade for beginners?

A good rule of thumb for all trading is that more volatility equals both more opportunity and more risk. If you are a beginner to the world of trading indices, you may want to avoid more volatile markets and trading hours, in order to simplify the amount of decisions you’ll need to make and information you’ll have to make sure you’re across before opening or closing a position. 

Novice traders will therefore want to choose indices which have lower intraday trading volatility. The major national price indexes are good options for this; for example the ASX 200, S&P 500 or the DAX 40. These indices are generally considered to have easy to spot trends and are popular markets. 

Another way to increase your skill at trading indices is to practise with a demo account. At VT Markets, we offer a risk-free 90-day trial period with no obligations, so you can practise opening and closing positions with your chosen index CFD in a live trading environment.

What time are the stock market indices available to trade?

Unlike Forex trading on the foreign exchange which remains open 24 hours a day, 5 days a week, stock market indices operate on local time schedules. By using a powerful trading platform like MetaTrader 4 or MetaTrader 5, you can easily monitor the opening and closing times of local prices, and make your move during their volatile opening hours, or play it safer with a strategy of opening and closing positions later in their specific trading day.

What’s the difference between index trading and stock trading?
Index trading relies on speculation about indices, which are baskets of many stock prices of companies which are listed on the same exchange. Stock trading, by comparison, is the buying and selling of a company’s stocks at their market price. The advantage of index trading is that the amount of stocks bundled together into that index can make it less volatile than trading the stock of a single company.

Index trading is a good option if you want to gain exposure to a growing economy, while stock trading can be useful for traders’ portfolios during periods of slow or subdued growth.

Soft commodities are the essential assets that underpin much of the global economy and are crucial to human sustenance and survival. They are also some of the oldest materials to be bought, sold and traded for, dating back centuries. 

Today, the soft commodities market is more sophisticated than the marketplaces and merchant bartering that once existed, and their high liquidity and the importance of their availability offer traders many opportunities to make profitable trades in global markets. 

In this article, we’ll define exactly what soft commodities are and how you can trade soft commodities both directly and through the use of financial derivative products. We’ll also discuss what factors can affect the price of a soft commodity and how to manage a portfolio that includes soft commodities.   

What are soft commodities?

Soft commodities are natural products that we cultivate and use for food sources, in construction, for the production of consumable goods and for other human activities. They are products of the earth but require human labour to produce them as goods that can be bought and sold. They are also known simply as ‘softs’.

Examples of soft commodities

Soft commodities vary greatly and are produced in different geographic regions all across the world, depending on the conditions that are most favourable for their production. However, they’re grouped together because they are required for human survival and are all natural materials that can then be refined or processed to produce other goods. 

Some examples of soft commodities are:

• Coffee beans
• Wheat 
• Cocoa 
• Sugar
• Rough rice
• Palm and kernel oil
• Cotton
• Hogs
• Soybeans
• Live cattle
• Oat
• Corn
• Lumber

Because soft commodities may be sourced from all across the world, issues like weather, supply chain disruptions and economic instability can all affect their price, creating opportunities for traders to speculate on their price movements in the short and long term. 

What are hard commodities?

In order to understand what commodities are, it’s helpful to know the distinction between hard and soft commodities. Unlike soft commodities, which are natural products but must be planted, grown, raised or otherwise cultivated, hard commodities are drilled or mined from the earth and are used in their raw extracted form. They are finite natural resources like crude oil and natural gas, as well as renewable energies like solar, hydro, wind and geothermal power. 

What affects the price of soft commodities?

Because soft commodities are products of the natural world, they are affected by both natural and man-made factors. Some of these include:

• Weather — Weather is, of course, a large determining factor in the price of any soft commodity. Good weather conditions are required for harvests and yields to meet their expected levels to meet supply, but extremely favourable weather conditions can actually lead to a problem of oversupply, which can cause a soft commodity’s price to drop significantly.
  
• Consumer demand — At the other end of the spectrum is the issue of demand. As consumer habits change, soft commodities can fall in or out of favour, affecting their price. For example, a rise in foodie culture has made consumers more aware of the types of cocoa beans: Forastero, Criollo and Trinitario and their different flavour profiles. As consumers become more invested in the subtle taste differences between chocolate produced with different cocoa beans, this can affect price.
  
• Political instability — Political instability and the threat of conflict can disrupt both the production of soft commodities and the ease with which they can be traded to meet demand. The recent war in Ukraine, for example, has impacted the price of grains like wheat.
  
• Supply chain disruptions — Increased transport costs, instability in developing nations and other supply chain issues can affect the flow of soft commodities into markets and thus drive their price up because of scarcity.
  
• Climate change — Unsurprisingly, commodities that are planted, grown and harvested or cultivated on the land are particularly vulnerable to issues of climate change. This could include issues of poor soil quality, natural disasters, changes to traditionally tropical or temperate climate zones and flood or drought periods.
  
• Labour issues — Labour issues in supply countries can also have a major impact on the price of certain soft commodities. If a sudden development in legislation leads to higher or lower wages for workers, this will have a knock-on effect on the price of the raw material they harvest or raise.
  
• Government regulations — National governments may impose quotas on the amount of commodities they produce that can be made available to certain markets. If government regulations or even sanctions prevent one country’s supply from meeting demand in a certain market, this will have consequences for the value of assets produced elsewhere.
  
• Seasonality — All soft commodities are governed by seasonality, and depending on where in the world they are harvested and how long the season is, prices will rise and fall according to this seasonal cycle.
  
• Global development — As parts of the world rapidly develop and experience population growth, new markets emerge that demand soft commodities to meet their needs. Especially in the long term, this global development has the potential to dramatically reshape balances of supply and demands. 

Why trade soft commodity markets?

Because soft commodities are needed by human beings all over the world, their fluctuations in availability offer some serious opportunities for traders to make a profit. Agricultural products are by their nature vulnerable to many forces and unpredictable, which offers both increased risk and increased rewards. Not all traders want to take on that risk, but for those who relish the challenge of a volatile market, trading soft commodities is a good way to maximise lucrative opportunities.

In the more sophisticated markets of the present, much of the soft commodities trade isn’t conducted by buying and selling the actual assets at on the spot prices but is instead by being traded on a futures market. Futures are legally binding contracts that set a fixed price for soft commodities, to be paid on a later date agreed to by both buyer and seller. Originally a method to help farmers and the agricultural industry to lock in favourable prices during non-peak periods, futures are today part of a larger, more complex trading ecosystem.

While futures entail an eventual delivery of assets, many traders offset futures prior to delivery, using the instrument as a way to speculate on predicted price movements, rather than the value of the underlying asset itself.

How do you trade soft commodities?

Trading soft commodities through futures is a high-risk endeavour. Futures contracts are traded on leverage, which means that traders only put up a percentage margin of the asset’s full value, but that both profits and losses are calculated on the total price. If you make a successful prediction on prices movements, you could offset your soft commodities future having taken magnified profits, but if an unpredictable factor causes the commodity to suddenly move in price, your losses, once calculated on the full position price, could far outpace your initial outlay.

For this reason, it’s important to have risk management strategies in place before you start trading soft commodities. Tools like stop-loss orders can help you to mitigate risk by automatically closing out positions that reach an amount you can’t afford. Deciding whether you want to go long or short when trading soft commodities is also important when choosing a strategy that you’ll implement. 

You can test out the waters first with a demo account. Then, when you’re ready to start trading soft commodities for real, you’ll need to set up a live trading account in order to open your first position. VT Markets makes this process easy and instantly connects you with over a thousand financial instruments in an institutional-grade environment.

Every soft commodity is slightly different in terms of production methods, geographical sources of supply, potential vulnerabilities and consumer behaviour. If you have an interest in a particular soft commodity — for example, if you want to learn how to trade coffee — it’s worth taking a look at our in-depth guides that examine these specific markets more closely. 

Start trading soft commodities today with VT Markets

At VT Markets, we make the process of trading soft commodities easy and lightning fast. Not only does our powerful trading platform give you the option to trade soft commodities of all types, but we also give clients trading tools, expert advisor access, daily market analysis and excellent support to help you manage and grow your portfolio. Talk to us today about opening your live account and seizing the right opportunities in soft commodities markets. 

FAQs

How do I start trading soft commodities?

In order to start trading soft commodities, you’ll need to decide which asset you’re interested in trading and how you would like to carry out those trades.

Once you’ve selected an asset you’re interested in, the next step is to choose which financial product you’d like to trade with and on which exchange. Soft commodities can be traded on the Intercontinental Exchange, the Chicago Board of Trade and the Kansas Board of Trade. However, traders can also choose to trade soft commodities through over-the-counter products (OTCs) through a broker like VT Markets. 

At VT Markets, you can gain exposure to soft commodities markets through leveraged trading while taking advantage of our powerful trading platform MetaTrader4 and its newest iteration, MetaTrader 5. We also provide all of our clients with access to trading tools, expert analysis, transparent pricing charts and forex signals, so you can monitor the market and seize the right opportunity when it comes. 

What’s the difference between hard commodities and soft commodities?

All commodities are physical materials and resources that are required for the production of food, energy, construction, technology, heating and transportation — just about every human activity. These are the raw materials that underpin the global economy, and they are the oldest forms of assets that were traded by human civilisations, going back hundreds of years.
Commodities are divided into two categories; hard and soft. Hard commodities are natural resources that are mined or otherwise extracted from the earth. They include precious metals like gold and silver, base metals like copper, nickel and cobalt, energies like crude oil and natural gas and renewables like solar power. Hard commodities are traded in their raw material form and come directly from the earth, while soft commodities require labour in order to grow or raise them. Soft commodities are in general less valuable per unit than hard commodities, but the role they play in everyday sustenance makes them very liquid and therefore profitable markets to trade in.

The reddish-brown metal we call copper has a wide range of use for the global economy, making it a highly traded commodity. Like many major commodities, the market for copper can be volatile and offer both profitable opportunities as well as a degree of risk for traders. 

Seen as an indicator of global economic health, copper remains a popular option for traders. In order to successfully learn how to trade copper, you’ll need to understand the forces that move this market and adopt a trading strategy that supports your goals. 

What is copper?

Copper is one of the hard commodities that hold many uses in the technology sector, as well as in heating, construction, plumbing, wiring, the heat regulation of machinery and more. While it is less expensive than other precious metals you can trade and not used for currencies in the way silver and gold are, copper’s properties make it an excellent conductor of both heat and electricity — thus its popularity as a tradeable asset. 

Copper is mainly mined in South America — Chile and Peru produce most of the world’s 19 million tonne volume that is traded every year. China also mines significant volumes of the metal and is the world’s leading producer of refined copper. 

Because of copper’s varied geographic origins and the fact that many of the world’s main suppliers of this metal are developing countries, the supply of copper can be easily disrupted or affected by a range of external factors. This vulnerability, coupled with high demand for the asset across a number of industries, makes for a highly liquid and volatile market. 

What is copper trading?

Copper trading seizes on the volatile, liquid nature of the global copper market, using speculation and wild fluctuations in price to create opportunities for profit. With volatility, however, comes heightened risk. Traders should be aware of the largest reasons the asset may rise or fall in price. 

Learn what moves the price of copper

Because copper is so heavily tied to infrastructure, it is seen as a particularly good indicator of overall global economic health. When the economy is in a growth period, money is invested into major infrastructure, making copper in high demand. However, during economic downturns, its price will often plummet as major construction and public infrastructure projects are put on hold.

Beyond these large global trends, here are some of the other factors affecting copper trading prices:

• Supply disruptions — With most of the world’s copper coming from the developing world, political, social and economic upheaval in these countries of origin can quickly disrupt global supply chains. A change in labour laws, for example, could quickly see major price changes that would affect the supply chain. This was observed in Bolivia in 2006 when former president Evo Morales announced the country’s copper mining industry would be partially nationalised.
  
• Emerging markets — As we’ve mentioned, infrastructure is a key driver of copper consumption, and the emergence of new markets that are invested in major development will lead to increased demand for copper. As new housing, electrical infrastructure, plumbing and transport are needed, copper markets can be expected to trend. Likewise, as growth in these emerging markets slows, copper prices can also predictably drop.
  
• Material substitutions — Rarely will the global market tolerate an asset rising in price indefinitely. As the cost of an asset like copper starts to climb consistently, manufacturers and investors alike will seek cheaper alternatives to keep costs down.
  
  When copper becomes too expensive for too long a period, metals like aluminium, nickel and lead will be used as substitutes until prices recede to more affordable levels. If your copper trades are sitting at unusually high prices, this is a method of flattening out the asset’s value, which could catch traders unaware.
  
• The US housing market — The sheer volume of the US housing market makes it a major driver of demand for copper. Housing construction uses copper for electrical wiring and plumbing, so when the housing market in the States is in a period of growth, copper can be expected to follow. 

Why trade copper? 

There are many reasons why traders choose to invest in copper.

• It’s a ‘safe haven’ investment: Copper is a physical commodity, meaning it holds its value even in times of economic strife. For this reason, it’s viewed as a safe haven investment, a popular reason why many investors choose to trade copper or trade gold.
  
• It can help diversify your portfolio: If you have an equity-only portfolio, adding a commodity like copper can help you to diversify your holdings and reduce volatility.
  
• It’s a way to hedge against inflation: Because copper is not tied to the value of any currency or currencies, it can hold its value even as inflation climbs. For this reason, many traders choose to invest in copper as a way of hedging against inflation.
  
• It drives high speculation: The liquidity and potential volatility of copper offer traders an opportunity to profit via copper CFDs. High speculation means potentially high rewards but can also carry with it risk. 

How do you trade copper? 4 easy steps to getting started 

If you want to get started with copper trading, VT Markets offer several ways to gain exposure to this market and begin trading. To start using our live trading environment, you’ll first need to create a trading account. This step only takes a few minutes, after which you can choose the asset and trading method you want to use. 

1. Select the copper asset you want to trade

Copper bullion and coins can be traded, but most copper trading takes the form of speculation on copper futures and with copper CFDs and ETFs, rather than copper bullion. 

There are various copper futures markets that you can trade in, including COMEX copper on the New York Mercantile Exchange and LME copper, which is the copper futures market on the London Metal Exchange. Different exchanges have different trading hours according to where they’re located. You may want to take this into account when considering how you will monitor your open copper trading positions.

2. Choose the way you want to trade copper

Although most copper trading speculates on copper futures rather than the spot price of the asset itself, these copper futures do usually entail physical delivery of the asset, which may not suit traders.

Instead of trading copper futures directly, traders can use derivative products in order to gain exposure and take advantage of market volatility without taking possession of the underlying asset. One way to do this is to trade the difference with copper CFDs. 

With a copper CFD or contract for difference, you are trading on the difference in price between the opening and closing positions of the underlying asset. Using fundamental and technical analysis of the market, you’ll make a prediction of the movement of the price. If you predict correctly, you’ll make a profit. If your prediction isn’t right, you’ll take on a loss. 

Copper CFDs are leveraged products, which means you trade on a percentage margin of the value’s total asset. You’ll only need to put down a fraction of the price to still receive full market exposure. This system magnifies losses but also maximises your potential profit.

3. Set up a risk management strategy 

In order to manage this potential for magnified loss, it’s recommended to have a risk management strategy in place when trading copper. This might be in the form of a stop-loss order or a limit close order — tools that can automatically close your position once it falls below your established threshold for acceptable losses. Limits can also help you lock in profits.

4. Open your first copper trade

Now, you’re ready to open your first position. You’ll need to download a powerful trading platform like MetaTrader 4 or its most recent upgrade, MT5, that allows you to execute orders quickly and gives you a transparent view of the market. 

Understanding different copper markets 

The strategy you choose to implement when trading copper will depend on what kind of market you’re dealing with. In general, there are strategies for two different types of markets: trending markets and consolidating markets. 

• Trending markets are also volatile markets — they are defined by soaring highs and swooping lows. Trending copper markets often align with the beginning and end of copper market cycles: periods of increased demand for production will drive up prices, while the end of large infrastructure products can lead to slumps across the market.
  
• Consolidating markets are more stable than trending markets — they signal that there is a balance between demand and supply side demands, and they tend to restrict prices within support and resistance lines. However, consolidating markets can still offer traders opportunities for profits via trading that takes advantage of shorter-term movements.

Ready to start trading copper?

With VT Markets, you can open and close your copper trading positions, backed by the full power of our trading tools, in-depth analysis, expert advisors and technical signals. If you need an online trading broker with exceptional client services and over a thousand instruments across all asset classes, VT Markets can help you to build up your portfolio and support you as you start trading.

FAQs

Where does copper come from?

Copper is a naturally occurring mineral, a metal that must be mined from the earth. Most of the world’s copper is currently mined in South America, with Chile and Peru producing around 5.7 tonnes and 2.2 tonnes of the metal respectively. After South America, China, The Democratic Republic of Congo and the US all produce relatively significant amounts of copper through mining. However, China is by far the most prolific producer of refined copper. 

How do you start trading copper?

To start trading copper, you’ll first need to decide on an asset you’d like to trade. Once this is established, you can choose between buying and selling copper bullion and coins or using different financial instruments like copper futures and copper CFDs to make trades with. 

After you’ve made these decisions, you can start looking at the copper market to find the right opportunity, which will depend on what kind of trading strategy you’re using. When the right option comes along, you’ll open your position and monitor it using trading tools, expert advice and daily market analysis and examining price charts to identify trends. 

Trading copper strategies can be complex, which is why many of our clients choose to first open a demo account. This demo offers a 90-day obligation-free trial period, where you can practise watching the market and opening and closing positions without any risk in an environment that closely mimics that of a live trading platform.

On Thursday, the S&P 500 and Nasdaq Composite experienced gains driven by positive quarterly results from Nvidia, leading to a surge in technology stocks. The Nasdaq rose by 1.71% to close at 12,698.09, while the S&P 500 increased by 0.88% to finish at 4,151.28. However, the Dow Jones Industrial Average declined slightly by 0.11% to close below its 200-day moving average at 32,764.65.

Nvidia’s shares soared by 24.4% after the company reported better-than-expected revenue guidance and strong performance in the previous quarter. The increasing demand for Nvidia’s chips in artificial intelligence applications contributed to its success. Following these results, several analysts raised their price targets for Nvidia, bringing the company’s market capitalization close to $1 trillion. Other semiconductor and artificial intelligence stocks, such as Advanced Micro Devices, Taiwan Semiconductor, Alphabet, and Microsoft, also experienced notable gains.

Despite the positive market performance, concerns about market breadth persisted, with some companies and sectors driving the market higher while others struggled. Additionally, negotiations to raise the U.S. debt ceiling continued, causing some uncertainty in the market. Talks between congressional leaders and President Joe Biden showed progress, but concerns remained as the default deadline approached. Fitch Ratings put the U.S.’ AAA long-term foreign-currency issuer default rating on a negative watch, citing the risk of missed payments on government obligations.

Data by Bloomberg

On Thursday, the overall market experienced a positive price change of 0.88%. The Information Technology sector performed exceptionally well, with a significant increase of 4.45%. Communication Services also saw a modest gain of 0.43%, followed by Industrials and Real Estate sectors, which both experienced slight increases of 0.30% and 0.28%, respectively. The Financials sector showed minimal growth with a 0.03% increase.

However, several sectors experienced declines on Thursday. The Materials sector saw a decrease of 0.38%, while the Consumer Discretionary sector suffered a larger decline of 0.52%. The Consumer Staples sector had a notable drop of 0.77%. The Health Care sector experienced a significant decrease of 1.04%, and Utilities and Energy sectors had the largest declines, with decreases of 1.38% and 1.89%, respectively.

Major Pair Movement

On Thursday, the dollar index performed strongly, supported by haven buying due to ongoing uncertainties surrounding U.S. debt ceiling negotiations. Additionally, positive U.S. economic data, including tight initial jobless claims, upbeat GDP, and core PCE data, have raised expectations of a Federal Reserve interest rate hike in July. This has diminished the previously anticipated rate cuts for the end of the year. While a resolution to the debt ceiling issue was expected by Friday afternoon, U.S. Treasury Bill rates remained elevated.

In the currency markets, the euro lost 0.2% against the dollar, primarily driven by the strength of the dollar due to rising interest rate expectations. The dollar’s safe-haven status remained intact as credit agencies warned of a possible downgrade of the U.S. sovereign rating.

USD/JPY broke above a key Fibonacci resistance level, reaching a high of 139.96, benefiting from widening U.S.-Japan rate differentials. The Bank of Japan’s Governor commented on potential adjustments to the Yield Curve Control (YCC) program, focusing on shorter maturities, but it had limited impact on the rising USD/JPY trend.

Meanwhile, GBP/USD experienced a slight decline of 0.33% as weak UK CBI data and concerns over fading UK economic performance overshadowed rising UK rates. Gold prices fell by 0.75% to $1,942 as speculators lightened their gold hedges in anticipation of a potential debt ceiling deal and took advantage of higher yields.

Bitcoin remained relatively flat at $26.4k, finding support near the lower 30-day Bolli band around $25.7k, while a close below the 50% Fibonacci level at $25.3k could potentially lead to a further decline towards the 200-day moving average at $22.7k.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Hits Two-Month Low as US Debt Ceiling Uncertainty Fuels Dollar Strength

The EUR/USD pair reached a two-month low on Thursday, trading around 1.0720 as the US dollar continued to exhibit strength due to concerns over the unresolved US debt ceiling negotiations. The absence of a deal on extending the debt ceiling created a negative sentiment, and House Speaker Kevin McCarthy’s update during the day indicated that a deal had not yet been reached.

The US data released on Thursday, including an upward revision of Q1 GDP growth to 1.3% and better-than-expected Initial Jobless Claims, further boosted the USD ahead of the Wall Street opening. Meanwhile, the Euro faced additional pressure as Germany reported a downward revision of Q1 GDP to -0.3% quarter-on-quarter. On Friday, the US is scheduled to release relevant figures, such as April Durable Goods Orders and the Personal Consumption Expenditures Price Index. No significant macroeconomic data is expected from the EU.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair is continuing to move slowly lower and has reached our support level, which is also exerting pressure on the lower band of the Bollinger Bands. It is expected that the EUR/USD will attempt a slight upward movement today and reach the middle band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 33, back above the oversold area, indicating that the bearish sentiment for the EUR/USD may be easing for today.

Resistance: 1.0788, 1.0848

Support: 1.0715, 1.0655

XAU/USD (4 Hours)

Gold (XAU/USD) Breaks Key Retracement Level as US Dollar Gains Support from Upbeat Economic Data and Debt Ceiling Concerns Persist

Gold prices (XAU/USD) broke below the 50% retracement level of the March/May rally, reaching a low of $1,930.20 during European trading hours. Although it bounced from that level, it is struggling to recover above it. The US Dollar found support due to a negative market sentiment and positive macroeconomic figures in the United States. The country revised its Q1 economic growth upward to 1.3% according to the GDP report, indicating a potential avoidance of recession but also raising the possibility of rate hikes to control inflation.

The strength of the US currency led to stock markets remaining subdued, as concerns about the US debt-ceiling limit persisted. Negotiations between President Joe Biden and top Republicans continue, with the opposition demanding spending cuts for an extension of the debt ceiling. Progress has been made, but a deal is unlikely to be reached today, according to House Speaker Kevin McCarthy.

Chart XAUUSD by TradingView

According to technical analysis, the XAU/USD is moving lower on Thursday and exerting pressure on the lower band of the Bollinger Bands. There is a possibility that the XAU/USD will attempt to move higher and reach the middle band of the Bollinger Bands today. Currently, the Relative Strength Index (RSI) stands at 34, indicating that the XAU/USD is in a neutral but still bearish stance.

Resistance: $1,962, $1,991

Support: $1,934, $1,913

Economic Data

Dear Client,

Please note that the dividends of the following products will be adjusted accordingly. Index dividends will be executed separately through a balance statement directly to your trading account, and the comment will be in the following format “Div & Product Name & Net Volume ”.

Please refer to the table below for more details:

The above data is for reference only, please refer to the MT4/MT5 software for specific data.

If you’d like more information, please don’t hesitate to contact [email protected]

Energy commodities are the natural resources used to power transport, electricity, heating technology; virtually all human activity worldwide. Because of this, energy commodities are in high demand globally, and the constant supply and demand make these markets ripe with opportunity for traders.

If you’ve ever wondered what energy trading involves or how you trade energy, read on for our in-depth guide into the industry, the types of trading available, and how to get started with making trades yourself.

Energy commodities

Commodities are the natural materials that much, if not all, of the global economy is built upon. They are both hard and soft commodities, which are divided into four categories:

• Energies – such as crude oil, heating oil, petrol and natural gas.

• Precious Metals – like gold, silver and palladium which are mined from the earth. 

• Agriculture – These are crops and plants which are grown and harvested for human consumption. Examples include sugar and wheat for food production, and wood for lumber and other building materials. 

• Livestock and meat – Cattle, sheep and hogs which are raised for use as food, or for other products like gelatine and leather.  

Of these categories, energies represent some of the most highly traded and in-demand commodities, because we rely on them for so much of our daily activity. Without energies, key systems such as transportation, technology, computers, mobile phones and manufacturing machinery would all grind to a halt. It’s no wonder that energies trading is such a potentially lucrative and popular market for investors to become involved with. 

There are both renewable and non-renewable sources of energy, both of which can be traded on global markets, these are:

• Renewable energy — which includes solar power, wind power, hydropower and geothermal power.

• Non-renewable energy — which covers crude oil and other petroleum products, natural gas, coal and nuclear energy. 

What is the energy trading market?

The energy market is the ecosystem of buying, selling and speculating on energy commodities that takes place in foreign exchanges around the world. The market sets a price for different commodities, based on factors which affect supply and demand. Traders then open or close positions based on their expectations for energy price movement. 

There are various factors to analyse when it comes to what moves the price of energy.

• Growth in emerging markets — In most developed nations, the demand for energies remains fairly flat. In developing nations however, growth is expected to rise sharply over the coming decades. This increased demand will affect the price of all energy commodities, especially those which rapidly growing nations choose to invest in for the future.
  
• Population growth — One factor that can have a major impact on the price of energy is population growth. On a global scale, the earth’s population is only set to rise, which increases competition for available energy resources. This has the potential to impact all nations, but particularly developing powerhouses like China and India, who face both exploding population figures and an increased migration from rural areas to more energy hungry urban cities.
  
• Energy penetration — While energy is a huge global market, there are still large swathes of the developing world which have no access to electricity. As these regions are developed and industrialised, energy penetration will increase, and along with it, demand.

• Industrialisation and developing economies — As new global powers emerge in the coming decades, the way they choose to industrialise and the energies they prefer will rapidly increase in demand. In order to make sound long term investments when trading energy, it’s crucial to keep abreast of the energy technologies that emergent countries like China and India are choosing to supply their domestic energy needs with.
  
• Energy efficiency — Finally, energy trading in the future will need to contend with the developed world’s quest for better energy efficiency, including investment in renewables to replace older forms of power. This could produce both flat growth for non-renewables in the developed world, and an increased demand for renewable sources of energy.

How does energy trading work?

In the UK, the energy trading market offers various ways for investors to gain exposure to this huge sector. The most straightforward method is to trade the raw materials, or commodities, themselves. This involves the buying and selling of actual energy assets on a volatile and highly liquid market. However, as most traders don’t have the capacity to physically take possession of large amounts of raw materials, this is perhaps the least popular way of trading in the energy market. 

Different types of energy also have different best practices when it comes to trading. Learning how to trade oil, which is a very highly traded commodity and extremely volatile, may involve very different strategies to trading a commodity like heating oil, which may be more stable and confined to a domestic market.

Energy stocks

With so many major corporations in the energy sector, energy trading via related stocks is a popular way to get involved in the market. Energy stocks in various companies can be bought or sold at a spot price, or traders may choose to bundle a collection of stocks together in order to speculate on price action within the market.

This second method of energy trading is achieved via derivative products, such as energy market spread betting (which is not taxed in the UK), or energy CFDs (contracts for difference, which are taxed in the UK).

Energy ETFs

Another way to trade energies is with energy ETFs, or exchange traded funds. These are investment funds that can give individual traders better access to the underlying assets in a particular market, including stocks.

ETFs are a good way to spread any risk across several assets rather than just one share, because they bundle together multiple stocks in order to shield you from the poor performance of a single one. Energy ETFs also allow you to diversify your portfolio by giving you access to multiple assets at once. 

How to trade energy 

How you decide to trade energy will depend on your goals. You may want to gain exposure to more markets, diversify your portfolio, ride out a volatile market for some short term gains or invest in a longer term strategy. Each different approach can be potentially profitable, but all require you to carefully research market trends, perform fundamental analysis, make use of technical tools and heed expert advice. 

Not all energy trading moves in line with the price fluctuations of the commodity itself. For example, a drop in the price of crude oil may be caused by instability and increased demand, in which case traders may choose to close their positions to reduce further losses. But in the case of oil company stocks, reduced supply could be good for business in the long term, and thus drive up share prices. Understanding the relationship between these factors is essential for trading energy successfully. 

How to become an energy trader with VT Markets

Because energy commodity markets are both highly volatile – allowing you to profit from short term price movements – and often considered a ‘safe haven’ for investors during periods of economic instability, they’re a popular option for traders.

If you want to get started with trading energy stocks, energy commodities or energy ETFs, you may want to first start practising opening and closing positions in a realistic trading environment, without the risk. By creating an obligation free demo account with VT Markets, you can do just that. Once you’ve set up your demo account, you’ll have 90 days to get to know the energy trading market, and begin to understand the way different factors move the price for energy commodities like oil CFDs, energy company stocks and more. 

Using a powerful energy trading platform

Because energy markets are highly liquid and often volatile, you need to trade with a powerful platform that will quickly execute your orders, and has automatic risk management tools like stop-loss orders in place. 

VT Markets uses the powerful MetaTrader 5 (MT5) platform to give our clients access to their trading platform from the comfort of their own computer or mobile device. Not only is it fast and convenient, but MT5 comes with a range of trading tools, including expert advisors, Forex signals and an economic calendar to help you manage your portfolio and perform your own technical analysis and research with ease. 

Staying up to date with energy market news

As well as monitoring price charts, indexes and trend graphs, a strong energy trading strategy should also take into account breaking energy commodity news. You’ll need to stay on top of the latest news that will impact the energy sector, as well as updating yourself with expert analyses that interpret the impact these developments will have on different energy markets. Remember, trading energy stocks may require further analysis – stocks won’t always move directly up or down in line with the commodity price itself. At VT Markets, we offer daily market analysis that clearly outlines what impact breaking news will have on your portfolio. 

Ready to start trading energy commodities?

If you’re ready to trade energies in an intuitive and transparent live trading environment, then VT Markets can get you started and ready to open your first position in just a few minutes. Open your live trading account today, and start finding the right opportunities in the energy market to take your portfolio to new heights.

FAQs

What is energy trading?

Energy trading is the buying and selling of assets and financial derivative products related to energy commodities; which include crude oil, coal, natural gas, wind power, solar power and hydropower. 

Because of frequent fluctuations in price and volume, energy markets are popular options for traders. The energy sector is also home to some of the largest blue-chip companies in the world, making energy trading through relevant company stocks another attractive option for investors. 

How do you trade energy?

There are numerous ways to trade energy commodities and gain exposure to this huge market in order to diversify your investment portfolio. In order to do so successfully, you’ll need a powerful trading platform like MT4, a strong fundamental analysis and the right tools to perform your own technical analysis. AT VT Markets, we make it easy to access the right trading tools and expert analysis, so you can study the markets and gain confidence in trading energies in the global markets.
If you’re looking for more advice before you start trading energies, feel free to contact our team and discover more about our world leading broker services.

It’s one of the most highly traded and consumed soft commodities in the world — an indispensable part of many people’s mornings and an industry worth over 100 billion US dollars annually.

With a huge global market that can be affected by many external factors and even the prices of other commodities, coffee trading can offer traders a chance to seize some profitable opportunities. 

In this article, we’ll cover how to trade coffee, the history of this soft commodity, as well as examine some of the factors that move its price and your trading options.

The history of coffee trading

Coffee is a soft commodity, meaning it is a natural product grown like other crops rather than mined or extracted as is the case with hard commodities (learn more about commodities and what they are in our in-depth guide). 

It’s an agricultural product that has been a common staple in diets around the world for centuries. In the Middle East, coffee was a popular beverage from the 15th century, and the Europeans discovered the flavourful bean in the 17th century — merchants quickly began trading for it. Coffee houses themselves were often popular destinations for merchants to meet and discuss trade agreements. 

Today, both the demand for coffee and how we trade it have grown in size, complexity and sophistication. Coffee plantations which were established by European colonists, developed into modern coffee suppliers, and the industry now produces close to 170 million bags of coffee beans for consumption every year. Coffee trading has moved on from barter deals between travelling merchants to offer huge potential for traders. 

Different varieties of coffee

The two main types of coffee traded on a global level are Arabica and Robusta. Both differ in taste and are also affected by external factors that will move their pricing. To decide which type of coffee you want to trade, you’ll need to understand what factors affect the price of each variety. 

• Arabica — Considered to be of higher quality, Arabica beans have a distinctive flavour and are often used by cafe chains and in quality roasted coffee blends. You may think this means they are traded at a consistently higher price than Robusta, but this is not always the case.
  
  Arabica coffee beans comprise 60–70% of the world’s coffee supply. It’s the type used by coffee house franchises like Starbucks, sourced mainly from Brazil and Colombia. Arabica is generally considered to follow more stable trends of price fluctuation.
  
• Robusta — Robusta coffee is higher in caffeine than Arabica, it grows in warmer climates and at lower altitudes than its higher altitude counterpart. People find the taste of Robusta coffee to be more bitter in general, and it has a more earthy flavour than Arabica, which tends towards acidity and fruitiness.
  
  It accounts for around 30% of the coffee trading market but can often trade at a higher price. The reason for this is Robusta’s demand among large multinational corporations, such as Nestlé, who use the beans for their global product lines like Nescafé instant coffee. Robusta beans are grown mainly in Vietnam.   

Where is coffee grown?

The demands of the coffea plant mean that it thrives in a specific geographic area, known as the ‘coffee belt’. This belt is a longitudinal area which extends outwards from the equator as far North as the Tropic of Cancer and as far South as the Tropic of Capricorn. Different types of coffee may be grown at different altitudes, but the major producers of most of the world’s coffee supply come from Brazil, Vietnam, Colombia, Indonesia and Ethiopia.

Coffee trading occurs in every part of the world, with the largest importers of beans being the EU, the US, Japan, Russia and Canada. With so many factors involved in growing, harvesting, roasting and transporting coffee, the coffee trade is rife with speculation and has many factors which may move its price. To learn how to trade coffee, you’ll need to become familiar with these fundamental aspects of the market.

Understanding what moves the price of coffee

As you might expect with a physical material that needs to be planted, grown and harvested, there are many factors which need to go right for coffee to successfully arrive in the market and be traded. If some of these triggers arise unexpectedly, the coffee trading market can quickly become volatile. 

This can be advantageous for traders who like the opportunities for short-term profits that volatility offers. However, you may prefer to trade coffee with a more stable price index if you intend to use trends to guide your trading.

• Climate — In 1977, a major frost in Brazil wiped out huge forested areas used for coffee production, sending global costs soaring. Unexpected climate issues like unseasonal weather, flooding, frosts and drought can ruin crops, driving up the price of the existing coffee stores as suppliers struggle to meet demand.
  
  Conversely, excellent weather conditions can lead to an overabundance of coffee beans and send the price plunging as buyers deal with extra supply.
  
• Consumer habits — Just as the European discovery of coffee in the 17th century led to a whole new economy of plantations and trade, consumer habits today still affect the demand side of coffee trading. 

The emergence of a more sophisticated coffee culture and specialty roasts has caused prices of certain coffee types and regions to suffer, as have health concerns about the effects of caffeine and the addictive nature of coffee.

Since coffee is less essential than food staples like wheat or rice, financial downturns and reduced consumer spending can also cause the coffee trade to take a hit.

• Plant disease — Coffea plants are fairly sensitive, and their yield can be affected by both climate and plant disease. As fungi like ‘coffee leaf rust’ have overtaken crops and ruined harvests, Robusta has often emerged as the more resilient source of coffee, thus affecting the price of both major coffee bean types.
  
• The oil market — Yes, the oil market can actually play a big role in the prices of coffee. Because the major producers of coffee — Colombia, Brazil and Vietnam — are located so far away from the major regions that consume coffee, a spike in oil prices will have a significant effect on the costs of coffee transportation, thus driving up coffee trading prices in turn.
  
• Distribution costs — Not just the oil price related to transportation, but overall shipping and freight costs can also impact the coffee trade and how much.
  
• Geopolitics — Coffee trading is affected by geopolitical issues and instability. Almost all of the world’s coffee supply is grown in developing nations, which may be less stable than first-world countries and thus have a less stable price.
  
  Likewise, political crises in nations that make up the majority of consumers will drive increased or decreased demand. The Russia-Ukraine war, for example, has affected the demand from Russia to consume coffee.
   
• The US dollar — Many commodities markets are priced in US dollars — the coffee trade being one of them. Fluctuations in the value of US currency will therefore have a knock-on effect on the price of the commodity market. 

How to trade coffee

If you’re interested in learning how to trade coffee, you’ll first need to choose which trade method you’re interested in.

• Spread betting on coffee: Spread betting is a financial derivative speculating on coffee’s price movements as an asset. It is tax-free in the UK and well-suited to short-term coffee trading.
  
• Coffee CFDs: Similar to spread betting, trading coffee CFDs involves exchanging the difference between a contract’s opening and closing position, which reflects the movements in the price of a coffee market. At the end of the contract, the two parties make the exchange, resulting in either a profit or loss for each party.
  
  Coffee CFDs attract taxes in the UK and are also a financial product that uses leveraging or margin rate trades. This means that a trader only leverages a percentage margin of the full value of the asset, and it can lead to greater profits, though it also carries a risk of increased losses.
  
• Coffee futures: A popular way to trade coffee, coffee futures take full advantage of the coffee market’s volatility, creating an exchange at a nominated future date for a set price, against which the market may or may not move in your favour. 

Ready to open your first coffee trading position? 

If you’re ready to start trading coffee, VT Markets make it easy to get started in a user-friendly trading environment. Start your free demo account and practise trading coffee CFDs and futures on a risk-free platform for 90 days, or jump straight in by creating your live trading account. 

Not sure how to open your coffee trading account? Talk to us about starting your trading portfolio today. 

FAQs

Is coffee a tradable commodity?

Not only is it possible to trade coffee, but it’s also one of the most highly traded commodities in the world. These days, as with the trade of many soft commodities, traders and investors can gain exposure to coffee markets not just through buying and selling the asset itself, but through the trading of coffee futures and options contracts, often through coffee CFDs. Both Coffee Arabica and Coffee Robusta are traded on the Intercontinental Exchange or ICE.

How valuable is coffee as a trading commodity?

Since coffee is widely consumed, it is a valuable global market from which traders can profit. The sector generates over 100 billion US dollars a year, and the volatility of the market offers active traders a chance to make quick and decisive open and closing positions that can earn short-term profits. 

How is coffee traded?
There are various methods for trading coffee, including trade through coffee CFDs, coffee futures and options. To effectively monitor the coffee trading market and make the right calls in a timely manner, you need a powerful platform that you can easily access during trading hours and which allows for the speedy execution of orders.

At VT Markets, we use the powerful platforms MetaTrader 4 and MetaTrader 5 to give our clients a transparent, restriction-free trading environment where they can execute their coffee trading strategy seamlessly.

Oil is a major energy commodity that is relied on globally to produce gasoline, diesel and petrochemicals that power much of the world’s activities. Like all hard commodities, it’s a raw material on which much of the global economy relies — in fact, it’s the most commonly traded commodity in the world. That volume of trading has created many derivative financial products, including oil CFDs. 

The oil and gas industry

There are different types of oil that are traded internationally: crude oil, no lead gasoline, natural gas and heating oils. While some of these oils tend to be traded more locally, crude oil remains the largest of these sectors in terms of trade and is sourced from different points of origin around the world. The volume of crude oil trading and its varied points of origin mean that this asset is particularly vulnerable to geographic, political and economic instability, all of which make the market particularly volatile. 

Volatility in markets spells both risk and opportunity for traders because they increase the size and frequency of price fluctuations. If you want to gain exposure to the oil market and potentially capitalise on some of the profitable opportunities yourself, learning how to trade oil CFDs could be a good method to do so.

In this article, we’ll define what oil CFDs are, how they fit into the oil market and what you’ll need to know before you start trading oil CFDs as an individual trader. 

Understanding how oil CFDs work 

CFDs are a type of derivative financial product that allows traders to get exposure to a market like oil trading without having to take possession of an underlying asset. CFD trading works by creating an agreement between an investor and a CFD broker — or more simply a buyer and seller — to exchange the difference in value of the underlying asset between the opening and closing of the contract. 

Unlike buying or selling the physical asset, oil CFDs (and any kind of CFDs) don’t deal with the buying and selling of a commodity; they make traders profits through the speculation on the changes in price of the asset. The changes are what generate profit or loss in this situation. Successfully trading CFDs requires a trader to understand the reasons and trends behind movements in the market, in order to successfully predict what moves will play out during a CFDs duration.   

What are oil CFDs?

Essentially, oil CFDs allow more traders to gain exposure to the large oil market through the use of leverage and without taking possession of the asset itself. This increased exposure can diversify your investment portfolio and, in doing so, lower your risk. Oil CFDs are used as a conduit for investors to trade in oil spot prices, oil futures and oil options. As the most commonly traded benchmarks of crude oil, most oil CFDs are concerned with WTI or Brent Crude Oil. 

WTI vs Brent Crude Oil prices

If you want to get into trading oil CFDs, it’s almost certain that you’ll be dealing with the two most common types of crude oil in the global market: West Texas Intermediate (or WTI) Crude Oil and Brent Crude Oil. Crude oils are rated for their density and their ‘sweetness’ or ‘sourness’ when it comes to assessing quality. Low density crude oils are preferred because they are easier to process and refine, while sweetness refers to the sulphur content in a given crude oil. The sweeter the oil, the lower the sulphuric content, which also makes refinement and processing cheaper. 

Understanding the key differences between these two and their defining features is a crucial part of fundamental analysis — something you’ll need to be across when trading oil CFDs. At a glance, here’s a snapshot of both types of crude. 

Brent Crude Oil 

• Sourced from oil drilling in the North Sea
• Responsible for setting the price of two-thirds of the world’s traded crude oil supplies
• Defined as a light crude oil, but not as light as WTI Crude Oil
• Typically refined in Northwest Europe
• Brent Crude Oil CFDs are traded over a five-day work week 
• Brent can be particularly vulnerable to crises and instability because it is relatively more widespread 

WTI Crude Oil 

• Sourced from land based oil fields in Texas, Louisiana and North Dakota
• One of the two main benchmarks for pricing of global oil markets, along with Brent Crude
• Graded as ‘Texas light sweet’ oil, both lighter and sweeter than Brent Crude
• Typically refined in Texas and Oklahoma
• Land-based drilling can make shipping and transport of WTI Crude Oil more expensive
• International events and instability have less of an effect on price
• Traded on the New York Mercantile Exchange (NYMEX)

Now that you have a basis for fundamental analysis of these crude oil markets, you can continue to study these external factors, as well as the price charts and indicators that make up the technical analysis of a market. Trading in oil CFDs requires you to have a good grasp of fundamental and technical analysis in order to ride out the volatile movements of the market.

How to trade oil CFDs

As we’ve mentioned, learning how to trade oil CFDs means learning how to engage in leveraged trading. All oil CFDs have a margin rate, and leveraged trading means that you trade on this margin, rather than the full value of the asset. Keeping control of your leverage and having a risk management plan are essential when trading oil CFDs. 

In order to start trading oil CFDs, you’ll need to follow a few steps: 

1. Familiarise yourself with live trading. Decide whether you want to trade oil CFDs for Brent Crude Oil, WTI Crude Oil or both. Once you’ve made your choice, you can open a demo account and start practising by monitoring the trading tools and indicators within the trading platform and opening and closing oil CFD trades in a risk-free environment.
   
2. Create your oil CFD trading account. When you’ve managed your demo account for a while and feel comfortable with the trading environment, you’re ready to jump in by creating a live trading account, downloading the trading platform and depositing funds.
    
3. Manage your risk. With your trading markets decided on and your account created, your next step is to establish your risk management tools and strategies, so you don’t end up with more losses than you can deal with.
   
   We recommend using stop-loss orders and limit-close orders — these tools will automatically close your position if it dips below an acceptable loss threshold you’ve set up.
   
4. Study the market. Analysing the oil market and making correct predictions about the movement of oil’s price will take more than a brief overview of the fundamentals. You’ll need to research both fundamental analysis and technical analysis in depth, keep an eye on breaking news and watch trending performance over time in order to recognise patterns.
   
   Successfully trading oil CFDs will require you to understand both the data behind market movements and the broader social, political and economic context in which they operate.
   
5. Formulate a strategy. Do you want to open and close positions on a short-term basis or ride out a trading strategy with a longer-term plan? There are lots of strategies for both long and short-term oil CFD trading, so be sure to decide on one that suits your portfolio and goals and implement it properly.
   
6. Think about diversification. Oil CFDs are part of a larger puzzle that fits together with other pieces to create a portfolio that is diversified and has lower overall risk. If you want to trade energies like natural gas, no lead gasoline and heating oil along with crude oil, VT Markets has the advice to get you started. 

Interested in other methods of oil trading? Check out our in-depth guide on how to trade oil.

Trading oil CFD futures

One of the other benefits of oil CFDs is that they allow you to trade oil CFD futures. Futures are agreements between two parties to exchange an asset at a fixed price on a nominated date in the future. Whereas oil futures are traded on local exchanges, oil CFD futures give you as an investor the opportunity to trade on the price movements of these future contracts in the form of an over-the-counter product.

The pros and cons of trading oil CFDs

As with any trading method, oil CFDs have their own advantages and disadvantages, which you’ll need to weigh up before you get started. 

Pros

• Trading oil CFDs requires you to trade with leverage, which means traders only have to place a percentage margin of the full trade value as a deposit. This can give you increased exposure in oil markets and has the potential to maximise your profits. 
• Oil CFDs give you the chance to gain full exposure to the oil market without needing to take possession of any physical assets.
• Trading oil CFDs can be thrilling for investors who want to challenge themselves in volatile markets. 
• This volatility also opens up more potential opportunities for traders to make a profit. 

Cons

• It’s worth noting that oil CFD trading is not permitted in the US and is taxed, unlike other methods such as crude oil spread betting​​.
• Leveraged trading can maximise your profits, but it can also amplify your losses. You should bear this in mind and have a strategy in place for mitigating the risks involved with trading oil CFDs. 
• The oil market is volatile and requires close monitoring as well as detailed knowledge of your chosen market if you want to trade oil CFDs. 

Learn how to trade oil CFDs with VT Markets 

Learning how to trade oil CFDs definitely takes practice and familiarity with volatile global oil markets. Fortunately, with VT Markets’ demo trading accounts, you can become more confident opening and closing your position in an environment that mimics the experience of a live trading environment. 

We use powerful platforms MetaTrader 4 and MetaTrader 5 to provide our clients with an easy-to-navigate, transparent trading platform that can be downloaded to your computer or mobile device for simple market monitoring. As well as lightning-fast order execution and restriction-free trading, we offer our clients state-of-the-art trading tools and market analysis to give them the insights they need to trade oil CFDs.

Want to jump into oil CFD trading but not sure where to start? Talk to us today about starting to develop your trading style with the help of our platform.