Commodities binary options are derivatives that enable traders to speculate on the price movements of commodities such as gold and oil without owning the underlying assets. This in-depth tutorial will examine the fundamentals of trading commodities.
Steps to Start Trading Commodities
- Step #1: Pick a reputable broker
- Step #2: Perform market analysis
- Step #3: Determine your position
- Step #4: Choose the expiry time and investment amount
- Step #5: Execute and journal your trades
Commodities Binary Options vs. Traditional Commodities Trading
Here are five key factors to better distinguish commodities binary options from traditional commodities trading.
1. Underlying Asset
Compared to the traditional commodities market, you have no ownership over the underlying assets (such as gold or oil) in commodities binary options. Instead, you track a specific commodity’s movement.
2. How it Works
You speculate on the commodity’s direction (whether it will go up or down) within a fixed timeframe. If you are correct, you will earn a fixed profit. On the other hand, you will completely lose your invested amount.
3. Value Proposition
Commodities binary options offer a simple way to achieve exposure to a specific commodity without actually owning the underlying asset. Thus, you can take advantage of the short-term trends in the commodities market without investing.
4. Limitation
The nature of the commodity’s binary option forces you to speculate the commodity’s direction within a relatively shorter time frame (as quick as a few seconds). In contrast, direct ownership in the traditional commodities market allows you to employ longer-term trading strategies.
5. Macroeconomic Considerations
Key macroeconomic factors, such as the prevailing geopolitical environment, the demand from importing countries, and the corresponding production or supply levels from exporting countries, as well as the prices of equities (which generally have an inverse relationship with commodities), impact both commodities binary options and traditional commodities markets.
How to Trade Commodities Binary Options: A Detailed 5-Step Process with Analysis
Here’s an easy 5-step guide you can follow to begin trading commodities binary options:
Step 1: Choose a Reputable Broker
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- Min. deposit $10
- $10,000 Demo
- Fast Execution
- High Profit up to 95%
- Fast Withdrawals
- Free Signals
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- Min. deposit $10
- $10,000 Demo
- Fast Execution
- High Profit up to 95%
- Fast Withdrawals
- Free Signals
Choosing a reputable broker that supports binary options trading for commodities is vital to safeguarding your capital. Here are two brokers we recommend, along with essential details about their commodities binary options platforms:
Pocket Option
Pocket Option is recognized for its easy-to-learn and user-friendly interface on its website and mobile application. With a broad range of available assets and markets for trading, the platform is especially preferred by beginners in binary options trading in commodities.
Quotex
Quotex stands out as another noteworthy platform. It is highly valued for its advanced features, which include extensive analytical trading tools suitable for more experienced and advanced traders.
Step 2: Perform Market Analysis
For commodities binary options, you can focus on:
Most Recent News and Developments: Stay updated with the most recent news affecting the commodities market (e.g., geopolitical events, demand and production changes, and inventory levels)
Major Macroeconomic Events: Pay close attention to key macroeconomic indicators such as inflation data, interest rate, economic growth, and prices of equities (generally, a rising stock market inversely affects the prices of commodities, particularly precious metals such as gold and silver)
Step 3: Determine Your Position
After performing your market analysis, you are more informed on a specific commodity’s direction.
Prevailing Market Sentiment: Observe the prevailing market sentiment toward a specific commodity. One way to determine this is to review how a commodity (gold, for example) is illustrated and described in different media channels.
Technical Analysis: Monitor the commodity’s price movement, including the general trend and reaction to key price levels. Likewise, you may use technical indicators to aid you in identifying prospective short-term trends.
Our Tip For Binary Traders:
(Risk warning: Your capital can be at risk)
Step 4: Choose Expiry Time and Investment Amount
Choosing the appropriate expiration time and position size in binary commodities options is crucial to managing your total risk exposure in any trade. Consider the following general guidelines:
Shorter Expiry Times (e.g., a few seconds to minutes) are better suited when anticipating a quick price reaction to a specific event or development.
Longer Expiry Times (e.g., 1 hour and above) are better when expecting more “gradual” price shifts.
Investment Amount: It is essential to conservatively handle your risked capital by adopting a disciplined trading approach and avoiding wiping out your portfolio. A practical starting rule is to risk only 1% to 2% of your total capital in any trade.
Step 5: Execute and Journal Your Trades
Execution: Set your trade after carefully picking the suitable expiry time and investment amount.
Bullish Forecast = Pick Up or Call
Bearish Forecast = Pick Down or Put
Journal: Keep a comprehensive record of each trade, including your analysis, the rationale of your decision, the outcome, and the lesson/s you learned after each commodity binary options expire. This crucial habit is necessary to improve your “trading edge” over time.
Popular Commodities to Trade with Binary Options
The following are five of the most popular commodities you can trade with binary options:
1. Gold – Traditionally considered a “safe haven” asset in economic uncertainty
2. Silver – A precious metal like gold but with more industrial use cases
3. Brent Oil – Crude oil primarily drilled from the North Sea (Atlantic) oilfields
4. WTI Crude Oil – West Texas Intermediate Crude Oil is extracted from oil fields in the US
5. Natural Gas – Fossil fuels in the “gaseous state” instead of in “liquid state” (like in oil)
Pros and Cons of Trading Commodities Binary Options
- Short-term oriented
- Hedging instrument
- Less exposure to long-term uncertainty
- Streamlined decision making
- Weekend trading
- Extremely short-term oriented
- Regulatory concerns
- Limited supported commodities
- Potential for overtrading
- Prone to oversimplification
Pros | Cons |
Short-Term Oriented Compared to the traditional commodities market, binary options for commodities are positioned for quick intra-day trades (as low as a few seconds to a few minutes). Thus, given a suitable scalping-like trade strategy and proper risk management, you can have a considerable profit potential over time. | Extremely Short Term Oriented In contrast, the highly short-term nature of commodities binary options can also be detrimental, particularly for beginners who lack the proper risk management framework and suitable trade strategy appropriate for the rapid trade durations. |
Hedging Instrument In more advanced use cases, commodities binary options can be used almost instantaneously to hedge a particular position in other markets or timeframes. For example, one might use gold to hedge against an equities position because of their inverse relationship or trade in a much shorter-term timeframe opposite to your long-term positions in the traditional commodities market to account for short-term developments. | Regulatory Concerns Regulations for options trading vary significantly across regions and countries. In general, commodities binary options trading is less regulated than traditional commodities trading, potentially exposing traders to higher unsystematic risks (such as scams and fraud). This is also why choosing the right binary options broker is crucial in reducing these risks. |
Less Exposure to Long-Term Uncertainty Since commodities binary options are highly short-term in nature, you can avoid the risks associated with holding a position for a prolonged (longer-term) period. This is particularly helpful in volatile markets such as commodities, where the short-term movement can deviate greatly from long-term trends. | Limited Supported Commodities The range of supported commodities varies widely from broker to broker. For instance, the brokers we highly recommend in this guide (Pocket Option and Quotex) support a different number of commodities. Pocket Option supports all five commodities we have listed, while Quotex supports only four of these commodities. |
Streamlined Decision Making Compared to traditional commodities trading, you do not need to set trade parameters such as “target price” and “cut loss” points. Instead, you simply have to make an informed decision on whether a specific commodity will go up or down in a particular timeframe without stressing about what happens beyond that specific timeframe. | Potential for Overtrading The fast-paced nature of commodities binary options trading can lead to emotional and undisciplined trading habits, which may culminate in overtrading. This is especially the case for beginners who have not developed proper trading frameworks and are not used to this “fast” trading environment. |
Weekend Trading Finally, commodities binary options can be traded on the weekends, allowing traders who normally cannot participate during traditional market hours to do so. This also enables you to capitalize on the events that unfold on weekends. | Prone to Oversimplification In contrast, the format of binary options, which essentially involves just choosing whether the price of a commodity will go up or down, can mislead traders—especially beginners—into not adopting appropriate trade and risk management strategies. |
Which Strategies for Trading Commodities Binary Options are Suitable?
1. Range Trading
Range trading refers to capitalizing on a relatively predictable “bounce” on either the support or resistance area (which must be identifiable) of a given range or consolidation. This is especially useful for commodities relatively less volatile than other asset classes, such as precious metals (gold and silver).
2. Trend Following
Trend following may utilize technical and sentiment analysis to pinpoint current trends and unfolding price patterns. The rationale behind this strategy is that trends are like ‘massive waves,’ and you never want to counter their direction.
Nevertheless, an intimate understanding of chart patterns and price trends and careful evaluation of ongoing sentiment is needed to ensure the trend remains intact and avoid being caught in an unexpected reversal.
3. News Trading
This strategy focuses on monitoring news and events and acting upon the information based on its presentation in media channels. Such developments may include geopolitical events, changes in demand and production, and inventory levels. Similarly, key macroeconomic indicators, including inflation data, interest rates, economic growth, and movements in equities (as explained earlier), are also considered.
Key Risks of Trading Commodities Binary Options
Negative Correlation Risk: Commodities generally have an inverse relationship with equities. Thus, a sudden shift in equities market sentiment can also affect commodities.
Market Environment Risk: Any changes in expected demand and supply levels from importing and exporting countries may instantly shift market sentiment.
Macroeconomic and Geopolitical Risks: Market participants are exposed to macroeconomic factors (as covered earlier) and geopolitical instability that may affect the price of commodities.
Regulatory Risk: Since binary options regulations can vary immensely across different regions and countries, any unforeseen regulatory change may pose a risk.
Behavioral Risk: Binary commodities options trades have a much shorter timeframe than the usual trades in traditional commodities markets. Hence, they may cause psychological pressure and emotional reactions to sudden market movements, potentially leading to excessive risk-taking or overtrading.
Conclusion
Commodities’ binary options offer a practical alternative to traditional commodities market trading. Their use cases vary, ranging from straightforward benefits, such as simplifying conventional commodities trading, to more advanced utilities, like serving as a quick hedging tool against a specific asset class or timeframe.
Nevertheless, it is equally important to be mindful of the downsides and risks highlighted in this guide to avoid costly pitfalls and fully capitalize on the opportunities.
Most Asked Questions:
What are commodities binary options?
Commodities binary options are financial derivatives that allow traders to bet on the price movement of a commodity without buying the underlying asset (such as gold or oil).
How do commodities binary options work?
You speculate on the commodity’s price direction (whether it will go up or down) within a given fixed timeframe. If you are correct, you will earn a predetermined profit. On the contrary, you will completely lose your invested amount.
How do I start trading commodities binary options?
First, you must open an account with a broker offering binary commodity options. Choosing a reputable broker, such as Pocket Option or Quotex, is vital to avoid fraud or scams. Then, you can begin by practicing with a demo account before committing to actual trades.
What commodities can I trade with binary options?
Gold, silver, oil, and natural gas are the most common commodities for binary options trading. Nevertheless, checking the commodities a broker supports is essential, as this varies from broker to broker.
Can I trade commodities binary options on the weekend?
Yes, one of the advantages of commodities binary options compared to traditional commodities trading is the availability of weekend trading, which allows traders who usually cannot participate during weekdays to do so.