The price dynamics of CFDs are more likely to follow the classic rules of supply and demand than the quotes of standard commodities. This investment asset is well suited for speculators whose main goal is to sell and buy profitably. A financial instrument is not considered simple, and therefore requires some experience and special knowledge from the businessman. At the same time, with the competent use of contracts, the trader will be able to achieve a rapid increase in capital.
Characteristics of CFDs on agricultural commodities
A CFD is a financial derivative in which traders bet on a specific price movement when buying or selling. If a trader has made a correct forecast about a decrease or increase in quotes, then he makes a profit during the calculation. In case of a mistake, a person is able to lose his bet and fix a loss.
CFDs are similar to standardized futures settlements. Buying or selling an asset does not imply the actual delivery of goods, and the trader gets the opportunity to work even with relatively small capital. It is worth remembering that the dealing center charges commissions that must be paid regardless of the outcome of the transaction. In addition to potential losses, the strategy should take into account the broker’s commission.
Despite the popular belief that commodities are profitable, oil and gas generate far less income than conventional agricultural products. Agricultural raw materials directly depend on weather conditions and seasonality. These factors are much easier to predict than OPEC decisions or energy demand. Legumes and cereals are considered the most predictable goods. Trading these products is accessible even to a beginner who does not have special education and experience.
How to make money on CFDs for difference
Speculation through CFDs on agricultural products is much easier than trading currency pairs. To make a forecast, it is enough to follow the following instructions:
- The first stage is to identify the seasonal component. In most cases, such calculations come down to the usual averaging of the values of the selected asset. To determine seasonality, it is enough to compare the indicators of several past years and deduce certain trends.
Mathematical calculations can be automated by means of special indicator programs. By obtaining the desired seasonal trends, a trader is able to sensibly assess the real prospects of the selected product. If the average value gradually increases, then the dealer should make a purchase, and if it decreases, he should sell.
The advantage of this calculation method is the concentration on the most significant events. The speculator discards all insignificant factors and looks at the dynamics of demand by year or month. At the same time, there is a need to accurately determine the start and end dates of the season. Most often, these “boundaries” are blurred and do not coincide with calendar months. To clarify the date, special resources should be used, where seasonal factors are clearly indicated. - The second stage involves assessing the current balance of supply and demand. The businessman needs to determine the market situation, without taking into account exchange volumes. To obtain objective conclusions, it is recommended to correlate forecasts regarding the world harvest and consumption of the product with final stocks for this season.
Information on grain crops can be obtained on specialized resources or on the website of the ministry. The interpretation of the reports may vary, but when bidding on CFDs, you should pay attention to expectations of an increase in inventory. With a reduction in grain stocks, we should expect an increase in quotations. - At the third stage of analysis, it is recommended to study weather conditions and meteorologists’ forecasts. For a novice player, this is the most difficult stage, which requires some basic knowledge in the field of agriculture. Cereals and legumes can react differently to changes in temperature and humidity. For example, prolonged rains have a negative effect on wheat, but soybeans practically do not spoil.
To get an idea of the situation in the fields, the trader is advised to monitor the estimates of the Ministry of Agriculture. Reports on the state of crops are regularly published on the resource of the National Agricultural Statistics Service. On the website, crop conditions are categorized: very poor, poor, good, excellent. Depending on this assessment, it is worth drawing a conclusion about the effect of meteorological conditions on cereals. - The fourth stage involves the construction of basic technical marking. CFDs for difference are known to work well at key levels. To obtain entry points to a position, you should draw moving averages and identify the main trends. Thus, the trader will provide himself with clear signals to enter and exit the position.
Working with CFD contracts involves certain difficulties, but with the use of detailed instructions, the trader will be able to achieve a positive result. Before starting trading, you should think over a strategy of behavior and adhere to it throughout the operation.
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