How to trade forex and commodities

Rowan asks: I want to know more about trading with forex, oil, platinum and gold. How does it work and what are the risks?

Maya replies: Foreign exchange and commodities are probably the most risky sectors to trade simply because they are driven more by sentiment than fundamentals. With share investing there is more tangible information like earnings and profits and relative valuations to work with.

There are a lot of speculators in these markets and you never know what is going to drive the price on any day. There are jokes (although apparently there is truth in it) that traders will trade according to which way the wind is blowing!

Many of them make their money out of novices so it is a good idea to start off with a small amount of money that you are willing to lose in order to learn and develop your own trading model.

I spoke to Simon Brown, who was involved with Standard Bank’s online trading. Standard Bank offers quite a few instruments that allow you to trade in forex and commodities.

He has the benefit of having seen many traders come and go. His response is that “forex trading is high risk and really at the top end of trading and shouldn’t be attempted until one is already skilled in trading other products or assets”.

Now that we have got the health warning out the way, here are your options:

  • Currency futures which are listed on the JSE Yield-X board and currency warrants listed by Standard Bank (www.warrants.co.za).
  • Oil, platinum and gold can be bought via exchange-traded funds (ETFs) such as Absa’s New Gold (www.absacapitaletfs.com)
  • Standard Bank’s commodity warrants (Read the related article: “How trade platinum warrants”).
  • Standard Bank Exchange Traded Notes (ETN), which give you exposure to gold, silver, platinum and palladium.
  • RMB has a new oil ETN.
  • Commodity futures listed on the JSE Safex board, but these would be higher risk.

As a starting point Brown suggests investing into Exchange Traded Funds and Exchange Traded Notes as they are less risky. They don’t have gearing, so in other words you are not borrowing money to buy the listed asset and your potential losses are lower.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.

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