Commodity Forex Online Trading Secrets

What is commodity forex online trading? To a new forex trader

, the idea of trading commodities and trading currencies at the same time is confusing. Surely currency is the thing that we are trading? What do commodities have to do with it?

The answer lies in economics. Commodity forex trading is based on a specialized type of fundamental analysis of the forex markets. It is a strategy that recognizes that the economies of some countries are heavily dependent on certain imports or, more often, exports of raw materials such as oil, precious metals, agricultural products that contribute to an individual nation's GDP (Gross Domestic Product). Therefore, the price of those countries' currencies will be linked to rises and falls in the price of those particular commodities, and foreign currency traders can profit from following those prices.

Many of the smaller economic powers, especially in the developing world, are heavily dependent on the export of one or more raw materials. However, most currency traders would avoid those minor currencies since the political situation is often unpredictable, liquidity is low and fluctuations can be extreme.

This leaves us with three major commodity currencies that a trader might want to get involved with namely the Canadian, Australian and New Zealand dollars.

The Canadian dollar (CAD) is probably the most popular commodity currency for forex traders. Canada is the world's second largest exporter of oil, so it is obvious that significant changes in oil prices will affect the value of the Canadian dollar. When you combine this with the fact that the USA is a huge importer of oil, it is clear that the price of the USD/CAD pair is likely to react strongly to a major shift in oil prices.

Australia's major commodity export is gold. You could make a study of gold prices and their effect on AUD currency pairs but at the very least, if you are involved in any forex trades that include AUD you should keep an eye on gold prices. New Zealand's commodity exports are more varied so if you trade an NZD pair you will need to watch the general commodity price index (CRB).

It is important to understand that even where the link is very strong, currency values will not always respond to a change in commodity prices. Normal fluctuations tend to be ignored by the forex market. However, predictions or announcements of significant changes in the price of oil, for example, will likely be followed by a shift in USD/CAD. What is more, this does not necessarily happen right away, so a knowledgeable forex trader can get in on the action just as the trend is forming.

Of course, other factors will also affect prices. It is important not to concentrate on commodity values to the exclusion of all else, or you could be caught out. However, for certain currency pairs it can certainly pay well to understand commodity forex online trading. It is very important to keep your eyes open for any economic news affecting these nations and it would be wise to check out the economic news calendar at Forex Factory.

by: James Roshwood

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