Commodities are often seen as Singapore foreign exchange (forex) trading building blocks. While some forex traders do not pay attention to them, commodities play a significant role. Without them, you could not trade currencies.
The five most significant categories of commodities are energy, metals, agriculture, livestock and industrials, and they make up over two-thirds of the total global commodity market by value. The prices of these commodities are often susceptible to changes in global economic conditions. Forex traders must pay close attention to news releases and other events that could affect commodities prices if they hope to succeed in this market.
The role of commodities in forex trading
To understand the role of commodities in forex trading, it is essential to know what commodities are in general. It is an essential product used in commerce interchangeable with other commodities of the same type. The quality of a given commodity may differ slightly, but it still essentially has the same function as any other unit of the same type. For instance, a bagel from one store will not be seen as substantially different or more valuable than a bagel from another shop, even though the two items may have come from different bakeries.
This interchangeability is an essential characteristic of commodities. Unlike a work of art, which you can only exchange for another piece of art, or a house, which you can only exchange for another house, Investors can trade commodities for any other type of commodity as long as both parties are happy with the deal. All commodities are essentially the same in terms of their function in the marketplace.
Benefits of trading commodities
Investors can spread their risk across many different goods by buying commodities and avoiding putting their eggs in one basket. If, for instance, an investor believes that the price of oil will go up soon, they can buy a barrel of oil today and hope to sell it at a higher price in the future. If the oil price instead falls, the investor will still have their other commodities to fall back on.
This diversification is one of the main reasons commodities are included in many investment portfolios. By buying into a commodity index fund, investors can get exposure to various types of commodities without doing all the research themselves. This way, they can avoid picking individual winners and losers and let the market decide which commodities are worth investing in.
Commodities can be used as hedges against other investments. For example, if you have a portfolio of stocks and bonds, you might want to buy gold as a hedge against inflation. That way, if the value of your stocks and bonds falls, you will still have some protection against inflation.
What are the risks of trading commodities?
Like any other type of investment, there are risks associated with trading commodities. For example, if you trade commodities on margin, you could lose more money than you have invested if the market moves against you. Additionally, commodities can be volatile, meaning that they can move up or down quickly in price. This can make them difficult to trade, and it’s essential to understand the factors that influence commodity prices before investing.
Trading commodities in Singapore
The Singapore Foreign Exchange Market is the fourth largest globally, with a more than $330 billion daily turnover. This market comprises several different participants, including central banks, commercial banks, investment banks, hedge funds and retail traders. The Singapore dollar is one of the most traded currencies globally and is used to buy various commodities.
While commodities may not be as exciting as stocks or currencies, they are essential to any well-diversified investment portfolio. By understanding what commodities are and their role in forex trading, investors can make well-informed choices about their investments and hopefully come out ahead. Using a reputable online broker, going to home saxo and trying out a demo account before investing your own money is recommended.