How to trade aluminium for beginners
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In the global economy, aluminium may not attract as much attention as gold and crude oil, but it remains as one of the key industrial metals that are indispensable in many infrastructure development projects within the construction sector. Known for its lightweight and anti-corrosion properties, aluminium has many uses including roofing, doors and windows, among others.
Aside from its usage in the construction industry, there is increased demand for aluminium in the transportation industry because it is a key material in producing vehicles such as cars, planes, trucks, and trains. On top of this, we see the growing need for it in other products like beverage cans, electric wiring, and transmission lines, as well as in industrial applications.
Why trade aluminium?
One reason traders may choose aluminium is its sensitivity to economic activity. Demand for the metal can be influenced by developments in construction, transportation, manufacturing and infrastructure, making broader economic conditions an important consideration for aluminium markets.
China plays a particularly important role in the aluminium market as the world’s largest producer and consumer of the metal. As a result, traders may monitor Chinese economic indicators, industrial activity and production data alongside broader global economic developments.
The energy transition is another factor attracting attention to aluminium. The metal is widely used in electric vehicles, solar-related infrastructure and electricity transmission networks. Changes in production, economic activity and aluminium inventories can also influence the balance between supply and demand and, in turn, affect prices.
Trading aluminium does not necessarily mean purchasing tonnes of the physical metal and storing or taking delivery of it. Depending on the instrument and broker, traders can gain exposure to aluminium through futures, CFDs, exchange-traded products and shares of aluminium-related companies. Each instrument carries different characteristics and risks, so traders should understand how the specific product works before trading it.
Factors affecting price of aluminium
Supply and demand
The primary driver of aluminium prices in global markets is the usual push-and-pull dynamic of supply versus demand. Prices of aluminium increase when supply is low and the demand for it is high. Among all countries, it’s China that plays an important role in this interaction.
Production expenses
Aluminium prices are influenced by production costs. These include the costs of raw materials, energy, and labor. Storage costs can also factor in.
Geopolitical events
Policies, tariffs, and political unrest between nations can also impact the price of aluminium. For example, if a country imposes high tariffs on imported raw materials, domestic aluminium prices can go up because of less competition for it.
Exchange rates
Because aluminium is generally priced in US dollars, exchange rate movements can also affect its price. When the US dollar strengthens against other currencies, aluminium becomes more expensive for buyers in other countries. This can reduce demand in major importing nations and, in turn, influence global aluminium prices.
Technical indicators when trading aluminium
To help analyse aluminium price movements and market conditions, they may use a number of popular trading indicators:
- Moving Average: Displays the asset’s average price over a set amount of time. This indicator is used by traders to identify trends and potential levels of support and resistance.
- Relative Strength Index (RSI): Measures an asset’s price action strength by comparing gains and losses over a set time frame. It helps traders identify either overbought or oversold conditions for a particular asset.
- Bollinger Bands: Illustrate the moving average with upper and lower bands based on standard deviation. They are used to identify probable breakouts and reversals.
- Fibonacci Retracement: This indicator uses the Fibonacci sequence to determine potential entry and exit locations.
- Stochastic Oscillator: Compares the closing price of an asset to its price range and helps traders spot potential trend reversals.
How to start trading aluminum
If you’re new to aluminium trading, there are several factors to consider. First, you need to find a regulated broker that will offer access to aluminium-related financial instruments to take advantage of the demand for aluminium.
What services does this trading platform offer? Consider elements like trading fees, access to tools, customer service, and security. Once you select a broker or a trading platform, you have to create an account. Provide relevant personal and financial details to complete the account creation process. You can start trading once your account has been paid and your identification is confirmed.
If you’re trying to make money from a trade, the first priority is to protect your account funds. That’s why the importance of risk management cannot be overstated. It is also important for the trader to regularly monitor his trades, especially in volatile markets. Developments in China, including economic data, industrial activity, production and trade policies, can influence aluminium markets and may contribute to sharp price movements.
Common risks of trading aluminium
Like other commodities, there are risks in trading aluminium. First, overproduction of this metal can lead to a decline in its exchange value. For instance, China had a history of overproducing commodities and then dumping them on global markets. If the demand of aluminium doesn’t pick up in China, markets may suffer from an excess of aluminium, which can result in lower prices.
Aluminium also competes with alternative metals and composite materials. The tech industry is always on the come up with raw materials that are similarly lightweight and cheap. The proliferation of such materials can chip away at the demand for aluminium, which leads to price decrease.
Currency movements can also affect aluminium prices. Because aluminium is generally priced in US dollars, a stronger US dollar can make the metal more expensive for buyers using other currencies, potentially weighing on demand and prices. A more hawkish US Federal Reserve and higher interest rates can support the US dollar, although the relationship between interest rates, currencies and aluminium prices is not always direct. Other factors, including supply and demand, inventories, production costs and global economic activity, can also influence aluminium prices.
Start trading aluminium CFDs with FP Markets
Ready to explore other aspects of commodity markets through aluminium trading? FP Markets can provide you access to a range of global markets and trading platforms, with educational resources and tools designed to support market analysis.
CFDs are complex instruments and carry a high risk of losing money due to leverage. Before opening a leveraged position, traders should carefully consider their goals, financial circumstances and risk tolerance. Open a trading account, become an FP Markets trader and explore a wide range of instruments, and trading platforms to build comprehensive trading strategies.
Frequently asked questions (FAQs)
Beginners can trade aluminium through instruments such as CFDs or futures without owning the physical metal. It is advisable to learn the market, use a demo account where available, and apply sound risk management.
Aluminium prices are driven by supply and demand, production costs, energy prices, economic activity, China's manufacturing sector, and geopolitical events.
Yes. Traders can speculate on aluminium prices through CFDs or futures without buying or storing the physical metal.
