Introduction To Commodities Trading In Binary Options

Commodities are an integral part of the day-to-day life. Commodities have been used since the dawn of civilisation to advance the knowledge of humankind and to improve the overall quality of living. However, the association of value to a particular commodity and the constant changes in prices of commodities have led to the speculative nature of the commodities market. The past couple of centuries has witnessed the tremendous growth of commodities trading as an alternate financial product, where speculators and actual market participants played a vital role in contributing to the overall market dynamics.

 

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The last few decades were extremely vital for the growth and expansion of commodities trading as a viable investment opportunity, as investors were able to mitigate their risks by opting to move their investments to safer assets. Commodity trading is popular among all kinds of investors for both short-term and long-term investments, as commodities offer a safe haven against market volatilities that can tend to create huge movements in the Forex and stock markets.

Seasoned traders and speculative investors are already familiar with numerous conventional products available for trading in commodities, which are offered as Futures and CFD contracts. These products allow traders to hedge against all market fluctuations, without suffering a massive risk of loss from market volatilities. Speculators also use these products to take advantage of short and long-term fluctuations of the market. However, the concept of commodities binary options is still new, as it involves betting on the movement of the price of an underlying asset without actually investing in a commodity. Professional binary options traders have come up with new and exciting ways to make money through binary options products, and commodities are some of the most widely traded binary options assets in the industry.

Combining Binary Options Trading With Commodities Trading

Binary options trading with commodities is a relatively new idea, made popular by the rise in popularity of binary options trading among new-age traders. Binary options brought about a change in the way traders perceived the markets, as it allowed a new form of betting in the markets without actually holding an underlying instrument. Binary options assets are virtual contracts that have fixed expiry times, where the outcome of a trade is determined by the direction of an asset with respect to the original entry price. In simple terms, binary options trading enables a trader to wager a fixed amount of money on the direction of an underlying instrument and makes money if the asset moves in their favour, while loses money if the asset moves away from their original direction.

The fluctuating prices of commodity futures and CFDs provide an option for traders to bet on the price movements without actually purchasing or selling an asset. Binary options trading imply that there can only be two outcomes of a trade, either a fixed return or a fixed loss. The fixed upside and downside of a binary options trade are considered as one of the major advantages of investing in binary options. Therefore, traders can predetermine their risks in the market before they enter a position, and only loses the amount invested per trade, rather than the whole account equity in case of a massive drawdown.

Commodity trading can be volatile, as the liquidity in the markets can be minimal at times. As a result, commodities may experience significant spikes and massive slippages, all of which contribute to a risky environment for short-term traders. Binary options contracts are popular for their short expiry times, and it is common for profitable trades to turn into losses within a fraction of a second. Therefore, it is imperative for binary options beginners and amateur traders to be extremely careful while dealing with binary options commodities products and other allied instruments, especially during the early stages of their careers.

A Basic Outline Of The Commodities Offered in Binary Options Trading

Commodities are termed as all the assets that are freely floated in the markets, and there are hundreds of commodities that are constantly traded in the global economy. Unlike the traditional Forex or stock markets, it is virtually close to impossible for brokers to provide all the commodities available in the market for binary options trading. Although a handful of brokers may provide an extensive list of commodities, a majority of binary options brokers only provide access to around 10 of the most popular commodities in the financial markets. Here are the most common commodities that you can trade through a fair majority of our recommended binary trading companies:

  • Gold
  • Silver
  • Platinum
  • Palladium
  • Copper
  • Oil (Crude, Brent)
  • Natural Gas
  • Corn
  • Coffee
  • Sugar
  • Wheat
  • Soy Beans

Unlike other underlying asset classes, commodities allow traders to concentrate on a small group of assets and reduce their risks in the market. Trading can become a complicated affair for beginner binary options traders, as it is easy to be confused by the sheer number of tradable assets. Commodities, on the contrary, enable traders to choose a select few underlying instruments and diversify their investments according to their risk appetite. Binary Options commodity trading is predominantly popular among expert traders, as it allows them to earn stable results over longer durations, with comparatively nominal risks.

Why Trading Commodities Is Easier With A Binary Options Account

Conventional commodities trading in the financial markets involves buying and selling commodity contracts through Futures, which are virtually agreements between market participants to buy or sell a predetermined amount of the commodity at a future price and date. Futures trading does not actually involve the physical transaction of the underlying commodity but is merely a contract between a buyer and the seller. A Futures contract can be priced at thousands, or even hundreds of thousands of US Dollars (or its equivalent in other base currencies), which requires traders to invest a significant sum of money to be able to trade in the commodities markets. In order to enable smaller traders to speculate in the market or to invest in commodities Futures, brokers may offer a high amount of leverage for margin trading. Leveraged trading can result in losses that can far exceed the initial investment; still, traders will be required to actually own the contract to be able to partake in the transaction.

Conversely, binary options trading removes all the complex procedures involved in commodities futures trading, and smaller traders can minimise the risk of margin trading to a greater extent. Commodities in binary options only involve a basic wager on the direction of movement of an asset within an expiry time, and traders needn’t worry about the magnitude of the movement or other fundamental market factors. If a trader is accurate in his/her prediction, it results in an in-the-money (ITM) trade, while an error in judgement will result in an out-of-the-money (OTM) trade. ITM trades have fixed gains that can provide around 60% to 95% ROI, while OTM trades will only result in the loss of the invested amount. Some brokers may even offer the option of a refund for losing trades, which can qualify up to 25% returns.

Investors can control their risks in the commodities binary options market by choosing to invest as low as $10 per trade, while some brokers may even allow even smaller investments of $1. When compared to the leveraged futures trading, a binary option can provide relatively higher returns within a shorter duration, while keeping the risks in check. Of course, both products involve a massive amount of risk, but binary trading is relatively simple, convenient, and involves lower capital outflow than the traditional commodity futures trading.
Liquidity is one of the primary concerns for commodities trading, as traders may be unable to tap into the liquidity of the markets for the traditional futures market. Nevertheless, binary options traders don’t have to worry about any liquidity problems or problems of low/high volatility, as the binary options market allow traders to trade commodities 24 hours a day during the weekdays and during live trading hours over the weekends. Traders can enter into binary options contracts without any liquidity restrictions unless the broker has special conditions concerning the availability of such contracts.

Comparing Commodities, Forex, & Stock Trading In Binary Options

Commodity trading, if offered as CFD products, is similar in the trading dynamics to the Forex and Stock markets, while futures trading involve a different model to that of the traditional forms of CFD trading. In the binary options market, however, commodities, Forex, and stock trading are all similar in the trading concepts, payouts, expiry times, and the binary options types. Traders can virtually choose any binary options product, and enjoy largely comparable trading conditions, albeit with a few differences in payouts and expiry times.

Commodities are traditionally known to offer lower payouts than Forex or Stocks, but the ROI should still meet an average of 70% for winning trades. Some of the more popular commodities such as Gold and Oil may qualify for higher payouts, but it will depend on the broker. Brokers are transparent about their individual payouts policies and will provide detailed information about the payouts, minimum investments, and the types of binary options products that are available for commodities trading.

The Advantages Of Trading Commodities As Binary Options

  • Fast Paced Trading – Traders don’t have to wait for long to determine the outcome of a trade, as binary options have fixed expiry times that starts from 30 seconds. The fast-paced trading environment is exciting and can be rewarding for traders with a high-risk appetite.
  • Lower Capital Outflow – Binary options brokers, allow its users to start trading using a small trading capital, without needing to invest large amounts of money in traditional futures contracts. Binary options trading also prevent the need to trade on margin, as leveraged trading can lead to higher losses.
  • Less Complex Than Traditional Commodities Trading – Binary options trading is simple, as traders can bet on the direction of the movement of the market without having any advanced knowledge of the dynamics of commodities futures or CFD contracts.
  • Fixed Profit/Loss – Traders can choose the amount to risk per trade, as the losses are limited to the invested amount. The profits for winning positions are also fixed, making it easy to calculate the ROI and long-term profitability of trading.
  • Ability To Trade Around The Clock – Binary options trading allows a trader to trade around the clock, and without the limitations of trading due to liquidity or other volume-based issues. Brokers also provide an opportunity to trade on the move through excellent mobile trading apps for smartphones and tablets.

The Risks & Drawbacks Involved In Commodity Binary Options Trading

  • Reduced Option To Manage Trades – Commodities futures and CFD products usually allow traders to modify their positions in the market according to the development of the trade, but binary options trades can only be modified with several restrictions. It is particularly hard to manage short-term binary options trades, which means that traders are at the mercy of the markets until the time of expiry.
  • Reduced Number Of Assets – Brokers usually limit the number of commodities to less than 15, and it is rare for brokers to offer anything beyond that basic set of underlying assets from the commodities market.
  • Large Influence From Weather & Macro Economic Events – Commodities are hugely dependent on a wide variety of factors, including weather, news, and other economic events. The high volatility also leads to massive changes in price, which can make it risky to invest in the commodities.
  • Binary Options Trading Is Risky – Binary options product, in its entirety, is a risky investment. Binary options trading may be similar to gambling and betting, where the house has the best odds. Therefore, it is vital to choose a reliable and regulated trading partner to ensure the safety of your funds.

How To Trade Commodities Binary Options

Step1: Opening A Binary Options Broker Account

The first step to access the commodities market would be to choose a binary options broker that provides an exhaustive list of commodities through its brokerage service. Be careful with your choice, as some brokers limit the commodities binary options assets to Gold and Oil, and such brokers may not be suitable if you are looking to expand your investment portfolio to some of the most popular commodities in the market. Our professional binary options broker reviews offer individual analysis on all the different financial assets offered by a broker, which can help you in making an informed choice.

Step 2: Making Your Initial Deposit

You should only invest money in the markets that you can afford to lose. Binary options trading can result in the loss of your entire investments, which is why you should choose an initial deposit that not only satisfies your trading requirements but is also reflective of your risk appetite.

Step 3: Choosing The Commodity

You can either choose a single commodity or opt to invest in multiple commodities, as per your trading preferences. The choice of an asset depends entirely on the traders’ preference, as different commodities have different market characteristics.

Step4: Analysing The Market

Market analysis is the most important part of trading binary options successfully. Traders must indulge in a healthy combination of technical and fundamental analysis to evaluate the performance of a commodity in the markets.

Step 5: Choosing The Binary Options Product & The Time Of Expiry

There are different binary options products for commodity trading, such as range, turbo, classic, and ladder options, along with separate expiry times that are relevant to the type of option. Individual binary options products may have varying payouts and ROI, according to their underlying characteristics.

Step 6: Opening A Trade

Entering a trade is quite simple, as all you need is the investment amount and your option to call or put an option. Brokers usually provide all the essential trade information through the platform, which can be used to analyse the trade probability and other trading conditions.

Step 7: Trade Management & Outcome

Some brokers may offer the opportunity to manage trades, but even in that case, trade management may only be available for long-term positions. At the time of expiry, the platform calculates the potential returns as per the trade outcome, and credits or debits money to/from your account as the case may be.

Can Binary Options Trading Be Profitable For Commodities Traders?

Profits are not guaranteed in the financial markets, more so in binary options trading where brokers have the edge over traders. The commodities market carries the same risks as any other financial products, and the probability of losing more than the account equity is a significant threat in Futures and CFD trading. In that regard, commodities traders may benefit from the reduced risk and lower capital exposure through binary options trading, without making any significant compromises on the upside earning potential. In the event of a losing trade, traders will only lose their money invested per trade, rather than losing their entire account equity or owing money to their broker. Commodity binary options trading can be a profitable investment opportunity for traders, provided they follow all the rules and strategies of successful money management and proper evaluation of the commodities markets.