Trading CFDs and Commodities: Understanding 3 Key Features of Commodity Cycle

Cycle makes everything in the world fall in its own place. Life cycle for example teaches us about living, water cycle teaches us about rain, recycle teaches us about nature. The truth is, cycle keeps us alive and kicking within our personal, social and even our business worlds. Yes, you've read it right! Just like natural science, the science of trading teaches us that there are also several cycles that are involved in trading. One among these many cycles involves trading CFDs and commodities. Since I am as excited as your craving for educational trading satisfaction, I am now ready to spill the beans regarding the definition and the  stages of the commodity cycle with a hope that they will aid you on your journey as a successful trader.

What is a commodity cycle?

To be able to define the term "commodity cycle," we shall consider the individual definition of the words that make up the concept. According to the dictionary, a commodity is something that is sold for money while a cycle is defined as  a series of events or processes that is repeated again and again and it always happens in the same order. With these two definitions being put together, we can say that a commodity cycle technically talks about the flow of a commodity from one trader to another trader.

Stages of Commodity Cycle

Phase 1: The Law of Supply and Demand

In the initial stage of the commodity cycle, a trader may witness that the sudden demand for commodity inputs leads to the possible decrease of supply which in turn causes an increased rate of the concerned commodity in the market.

Phase 2: Margin Expansion

When the rates increase due to supply and demand, the producers will see their margins become wider thereby providing them additional capital for production. During this phase, prices additionally go higher and then stimulate inflation and economic growth.

Phase 3:  Additional Supply

With the occurrence of phase 2 the capital expenditures also hike up thereby increasing capacity to supply more commodities in the market. Consequently, market rates will start to be lowered In cases where there is a great demand for commodities such as coal, the producers start to practice substitution. With substitution, the demand and supply begin to equilibrate and prices start to stabilize.

Phase 4:  Market rates for commodities fall

Because of the increased supply the market is able to cope up with the demand of traders. This action will eventually lead to price rollbacks.

Phase 5:  Curtailing of Expenditures

As an effect of phase 4, suppliers will start to cut off the expenditures for production to maintain their profit.With this, the supply will once again start to lessen then the cycle goes back to the first phase.

The effect of commodity cycle to trading

One's familiarity and mastery of the commodity cycle has a great impact on the profitability of your account when trading CFDs and other commodities. The cycle itself helps you determine the present condition of your instrument in the market. Upon the identification of the current status, you can also use the phases of the cycle to predict future market movements.