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Commodities are raw materials like agricultural products, fossil fuels, and mineral ores. You can trade these physical goods in a financial market distinct from other securities like stocks and bonds.
The end of March 2023 saw global commodity prices fall roughly 30% below their historic June 2022 peak. According to the April 2023 World Bank Report, the price slump was mainly caused by slowing economic activity and a worldwide reallocation of commodity trade flows.
Another reason was the favourable winter weather that helped bring natural gas prices down by about 80% from their August 2022 maximum.
Policies hastening the energy transition help increase demand for metals like copper, lithium, and nickel and discourage fossil fuel production.
Such developments can help traders identify new trends in commodity trading. Trends help traders determine how to manage their portfolios to account for economic downturns.
But how do you trade commodities online, and what types of commodities can you trade? How can you improve your commodity trading if your profits aren’t doing well?
This article discusses the different commodities you can trade and provides tips to help you improve your trading skills and manage risks.
How to Trade Commodities
To start trading commodities online, sign up with a licensed and reliable online broker that offers commodities trading.
After opening an account, choose a commodity by taking a position and buying or selling that asset. Afterwards, monitor your trades to determine when you should exit your position and take profits.
Do You Not Need to Handle or Own a Commodity Physically?
Suppose you want to buy 50 bushels of wheat. Aside from the price, you’ll have to consider transportation costs, delivery time, and warehouse storage. And when you sell the commodity, your buyer must also consider these factors.
However, with derivatives, you don’t need to own the physical commodity. Instead, you buy a contract based on the underlying asset’s value.
Through derivatives, you have a chance to profit from commodities just by financing the transaction (paying for the contract without owning the asset). Furthermore, leverage gives you more freedom and a chance to profit significantly from small price changes but can also carry the risk of equally significant losses.
First Time Trading Commodities?
People use commodities daily. The food you eat, clothes you wear, and gadgets you use come from numerous ingredients or components using one or more of these commodities as raw materials.
Due to the necessity and daily use of commodities, supply and demand can significantly affect the price movement of these assets. Higher demand can lead to higher prices, and more supply can decrease prices.
Thus, pay close attention to supply and demand, as they can help you determine when to buy and sell commodities.
What Are Commodities?
Commodities consist of mined, grown, reared, or processed materials coming from natural resources or agricultural products. You can categorise these assets into hard and soft commodities.
Hard commodities are mined or extracted goods, such as precious metals, oil, and coal.
Soft commodities include wheat, coffee, meat, and cotton.
What Is Commodities Trading?
Like stocks, commodities can be bought and sold on exchanges. Some of the well-known ones are the London Metal Exchange (LME), Chicago Mercantile Exchange (CME), and Tokyo Commodity Exchange (TOCOM).
You can trade a wide range of commodities, including fungible ones (those of the same quality or grade) that can be priced based on a standardised quantity and quality.
What Do Commodity Traders Do?
When you trade commodities, you place your stake on a particular commodity’s future value. If you believe its price will rise, you may want to buy that asset (going long). If you think the price will fall, you can sell the commodity (going short).
Why Trade Commodities
Having a variety of commodities can help make your portfolio more diverse. The benefits of commodities trading include the following:
- Protection against inflation: Commodities can increase in value during periods of inflation.
- Precious metals as a hedge during adverse market
conditions: Gold is usually negatively correlated to the US dollar (USD) and U.S. stocks, meaning when currencies and shares drop in value, gold is likely to move the other way.
- Potential for large profits: Commodities usually trade on margin (buying and selling assets using borrowed money), giving you a higher potential for returns and
- Low startup costs: Some brokers allow you to start trading with only £500. For example, Taurex’s Standard account allows trading for a £500 account minimum.
Understanding the Commodities Market
Commodities consist of products with a standard quality and whose demand is high enough to get exchanged across different markets.
You can generally trade these assets by speculating their future value to make a profit.
However, manufacturers can also trade commodities to hedge their positions against the materials’ price fluctuations that may adversely affect the business.
Whether you trade hard or soft commodities, demand and supply usually impact their prices, and various macroeconomic events can influence the value of these assets.
What Are the Different Commodity Market Categories?
The commodities market is not just one marketplace but a collection of regulated exchanges worldwide. Learn about the different commodity markets in the following sections.
What Are Agricultural Commodities?
The global market for agricultural commodities is among the most heavily traded markets.
Transactions involve the following:
- Futures: These are contracts to sell or buy a commodity at a fixed date and price.
- Options: These are contracts that give you the right, not the obligation, to trade a security at a fixed price and date
- Commodity indices: These are weighted averages that track the price of a basket of commodities based on spot or futures
Major agricultural categories include:
- Grains and oilseeds: Products include wheat, corn, barley, oat, and
- Fertilisers: The most-traded products include urea and UAN (urea-ammonium nitrate) fertiliser
- Dairy: These milk and dairy products include cheese, non-fat dry milk, class III milk (spreadable and hard cheeses), and class IV milk (butter, evaporated, and condensed milk).
- Lumber and softs: Lumber refers to softwood harvested from coniferous Softs include sugar, coffee, and cocoa.
What Are Metal Commodities?
Metal trading is the buying and selling of futures and options of metals and includes the following categories:
- Precious metals: This category includes gold, silver, palladium, and platinum.
- Ferrous metals: Products include iron ore and steel.
- Base metals: These nonferrous (without iron) products include copper and aluminium.
Livestock Commodities
Livestock commodity trading includes buying and selling futures based on the farm animals’ value. Trading primarily revolves around cattle and pigs on markets like the Chicago Mercantile Exchange (CME).
Futures contracts involving livestock commodities trading on the CME include:
- Live cattle options: Cattle ready for slaughter and weighing more than 1,050 pounds (lbs)
- Lean hog options: Hogs weighing around 250 lbs and ideal for slaughter
- Feeder cattle options: Weaned calves not more than 800 lbs
- Pork cutout options: Pork carcass cutouts like ham, loins, and ribs
Livestock markets are usually volatile because factors like feedstock prices, transportation costs, livestock supply seasonality, disease risk, and weather can drive price changes.
For example, rising meat prices can help increase supply, allowing farmers to bring more animals to the market and take advantage of those high prices.
Energy Commodities
The volatility of the energy market may present favourable opportunities and risks for hedgers and speculators.
For instance, crude oil prices tend to be highly volatile due to changing demand, economic health, pipeline changes, and political events.
Examples of energy commodities include crude oil, natural gas, ethanol, heating oil, gasoline, and uranium (needed for nuclear energy).
Popular Commodities Markets
Some of the well-known commodities you can trade are energy assets that include the following:
- Brent crude oil: The oil comes from Europe’s North Sea oil Brent oil acts as the world’s leading indicator of oil prices.
- WTI crude oil: West Texas Intermediary (WTI) is the second most traded crude Traders exchange about 1.2 million WTI futures on the New York Mercantile Exchange (NYMEX).
- Natural gas: This commodity is the third most traded commodity by You can buy and sell natural gas in futures markets on exchanges like NYMEX.
Copper, Crude, Natural Gas, and Agricultural Commodities
Commodities are inherently linked to an organised society’s development.
For instance, mining and agriculture are human activities deeply ingrained throughout history. People used to trade commodities for another, like a copper ingot for sugar or a bushel of grain for oil.
As economies and societies develop, the trading and usage of commodities may also follow.
“What Commodities Can I Trade With Taurex?”
Taurex allows trading commodities through competitive leverage, hedging strategies, and low margin requirements. We offer trading opportunities for the following commodities:
- Metals like gold, silver, platinum, and palladium
- Crude oil (USOIL and UKOIL)
- Natural gas (XNGUSD)
- Gasoil
- Cocoa
- Coffee
- Sugar
- Cotton
How Can You Trade Indirectly in Commodities?
Here are some ways you can invest in commodities without directly trading in the underlying asset:
- Exchange-traded products (ETFs): ETFs and ETCs (exchange-traded commodities) are cost-efficient ways to invest in commodities. You can use ETFs to analyse an index’s performance and ETCs to track commodity prices.
- Commodity-based company shares: Companies producing, mining, or processing commodities can benefit from rising commodity prices by selling these products at a higher price.
- Collective investments: Commodity funds and investment trusts can provide investment opportunities in a portfolio of companies working with commodities like agriculture, energy, and precious metals.
Lower Your Entry Cost
The cost of buying into a commodity position is much lower than buying the same commodity in the traditional sense.
A broker can charge only 5% of the transaction cost, while some traditional brokers require an upfront cash payment of up to 50% of the total.
Suppose you’re a trader without the financial capacity of a prominent institutional investor. The lower price offered by a broker can allow you to enter substantial positions even with a small deposit.
Take Advantage of Leveraged Transactions
Another advantage you can gain by trading commodities is the ability to enter leveraged positions provided by a margin trading account.
With a margin account, your broker can lend cash to you using your account as collateral to purchase securities.
For example, a 5% margin can help boost your transaction size to 20 times (100% ÷ 5% = 20).
If you have $250 in your account, you can trade up to $5,000 worth of commodities ($250 ÷ 5% = $5,000).
The leverage offered by brokers means you can take trading positions several times larger than you can afford to pay upfront. Larger transactions can also help increase your profit potential, but also increase your potential for loss, as well.
Undated Spot Commodities vs Commodity Futures
Commodity contracts have specific delivery terms you must fulfill. For example, contracts for commodity futures trading have a set delivery or expiry date. Upon reaching this date, you cannot trade the contract anymore.
The following sections discuss the differences between undated and futures contracts.
Undated Commodity Markets
Contracts for undated commodities don’t have expiry dates. These contracts don’t expire because they don’t require you to own the asset directly.
Commodity Futures
When you have a futures contract for a physical commodity, and that contract expires, the supplier must deliver the commodities. For crude oil, you may receive a delivery notice informing you of the collection point where you will receive the physical oil barrels.
You can close or sell your futures contracts before the expiry date, especially if you think the price is acceptable for you to take a profit or roll over the contract.
Commodity Prices
Several factors can cause the price of commodities to fluctuate significantly, such as:
- Supply and demand
- Stock and inventory levels
- Currency strength
- Inflation
When analysing commodity prices, take note of these factors that can help you determine when and at what price you should enter or exit a position.
Commodities Costs
Transaction costs involved in commodities trading can vary among brokers and typically include the following fees:
- Spread: This is the cost of executing your Spread is the difference between a security’s buy and sell price.
- Margin: The margin is the money you pay to open a A margin account lets you make leveraged trades.
What Are the Margin Rates on Commodities?
Margin rates can vary depending on your broker of choice. As of November 2023, Taurex offers the following commodity margin rates:
- Brent oil (UKOIL): 5%
- WTI oil (USOIL): 5%
- Natural gas (XNGUSD): 1%
- Coffee: 1%
- Cocoa: 1%
- Cotton: 1%
- Gasoil: 5%
- Sugar: 1%
- Copper (XCUUSD): 1%
- Gold (XAUUSD): 2%
- Silver (XAGUSD): 5%
- Palladium (XPDUSD): 1%
- Platinum (XPTUSD): 1%
“How Do I Improve My Commodity Trading Results?”
Improving your trading involves performing actions that help increase your profitability and reduce your risk exposure. The sections below discuss the ways you can improve your commodity trading.
Get Educated
Before opening a retail investor account with a broker and trading, consider reading books or watching videos and podcasts on trading commodities.
Some brokers offer educational resources and video tutorials on their websites to help you trade commodities and become familiar with capital markets.
Taurex provides resources and tools, such as market research reports, educational materials, and expert insights, to help you analyse commodity markets and trade with confidence.
Analyse the Commodity Market
Developing your market analysis skills can help you succeed in commodity trading. Two ways to assess the market are fundamental and technical analysis.
Fundamental analysis involves monitoring and evaluating macroeconomic factors like a country’s economic health, geopolitics, and updates on specific industries like oil, mining, and agriculture.
Meanwhile, technical analysis involves observing price trends and patterns seen on charts to identify trading opportunities.
Manage Your Risk
When you speculate on price movements, you’re risking your capital. When you use leverage, you borrow money to fund a trade. Thus,
while leverage can help increase your returns, it can also increase your risk, especially when your trade doesn’t go as planned.
Consider implementing the following risk management strategies:
- Stop-loss orders: Setting a stop-loss order helps minimise your losses on a trade to an amount you can tolerate.
- Trailing stops: Implementing trailing stops involves setting up a moving stop-loss order that follows the price movement. Instead of placing a specific limit price, you can set the trailing stop several points away from the current price.
- Risk vs reward ratio: Specifying this ratio helps you determine what you can gain for each unit of currency invested. A 1-to-2 ratio means that for every $1 you risk, you can earn $2.
Diversify Your Portfolio With Commodities
Certain currencies can function as commodity currencies. For example, an oil price increase can lead to a weaker U.S. dollar. Alternatively, a weakening U.S. dollar can cause oil prices to increase.
If your portfolio consists of stocks or forex, consider diversifying by investing in commodities. Diversification can help minimise or offset your losses when your other assets decrease in value.
Commodity Trading Platform and Tool
Taurex provides trading platforms and tools to trade more than 1,500 financial instruments across commodities, shares, indices, forex and metals and enhance your trading experience.
MetaTrader 5
Taurex offers trading opportunities through MetaTrader 5, one of the world’s most trusted trading platforms. You can access MetaTrader 5 on your desktop or mobile device, and benefit from its advanced features and tools.
For example, with MetaTrader 5’s intuitive interface, you can customise charting and trading indicators and engage in automated trading.
Should You Invest in Commodities?
During stock market downturns, investing in commodities can help you control potential losses.
You can consider trading in commodities if you already have enough trading experience. The commodities market can have high price volatility and the potential for significant losses.
Because commodity trading is high-risk, you should consider allocating only a small part of your portfolio to commodities.
Why Trade Commodities With Taurex?
Taurex allows you to benefit from the following features:
- High-speed order execution
- Tight spreads
- Secure trading
- Seamless trading experience on MetaTrader 5
- 24/5 expert support worldwide
Taurex is also regulated by the Financial Conduct Authority (FCA) in the United Kingdom
Commodity Trading FAQs
1. Which commodity trading is best for beginners?
Many commodities have a consistent or global demand. Some asset classes perform better over time due to limited supply.
With these characteristics in mind, beginner traders can consider trading crude oil, gold, and base metals.
2. How do you trade in commodities online?
To trade commodities online, you must sign up with a licensed online broker and fund your account to buy and sell those assets through derivatives.
3. When can you trade commodities?
The time to trade commodities depends on your broker and the exchange where those assets are sold.
Some of the commodities Taurex offers have the following trading hours:
| Commodity | Trading hours |
| WTI oil (USOIL) | 1:00 AM to 11:59 PM |
| Natural gas (XNGUSD) | 1:00 AM to 11:59 PM |
| Coffee | 3:00 AM to 11:59 PM |
| Sugar | 1:00 AM to 11:59 PM |
| Cocoa | 10:45 AM to 6:55 PM |
4. Is it possible to trade commodities online?
Trading commodities online is possible if you have an account with a licensed broker. After funding your account, you can begin trading.
5. What are the precious metals market hours?
The precious metals market opens from 1:00 AM (UTC+2) on Monday to 12:00 AM on Friday (UTC+2).
6. What are the trading hours for oil?
Taurex offers crude oil trading during these hours:
- Brent oil (UKOIL): 11:30 AM to 6:55 PM
- WTI oil (USOIL): 1:00 AM to 11:59 PM
7. What is the minimum trade size for gold, silver, platinum, and palladium?
Precious metals typically have a trade size of 0.10 lots. One standard lot equals 100 ounces (oz).
If you trade 0.20 lots of gold, you are trading 20oz of this metal (100oz x 0.20 lots = 20oz).
8. Does Taurex charge a commission?
Taurex’s Standard and Pro accounts are commission-free. For the VIP account, Taurex charges up to $2 per side.
A “per side” cost is the transaction fee for opening a position in a market.
9. Do you have 24-hour support?
Our customer support consists of vastly knowledgeable staff available 24 hours daily, five days weekly, through telephone, email, live chat, or a support ticket.
10. What is physical commodity trading?
Physical commodity trading is buying physical commodities from sellers based on spot prices (the asset’s current market price) and having those assets delivered.
For example, you visit a website selling precious metals and purchase gold bars. After confirming the order, the seller ships the items to your address.
Another example of physical commodity trading is when oil companies buy and store oil barrels and sell them to customers.
11. What is derivatives trading?
Trading derivatives involves buying and selling financial contracts like futures, swaps, and options. Derivatives let you profit from price movements without owning the underlying asset.
12. How do I become a commodity trader?
You can become a commodity trader by opening an account with a trading broker. A demo account can help you practise trading strategies before risking real money.
You can also become a commodity trader by joining commodity exchanges that trade futures, swaps, or options.
13. What is leveraged commodity trading?
Leverage or margin trading allows you to fund a percentage of the contract’s total value.
Suppose you plan to buy a futures contract worth $100,000, and the broker’s margin rate is 10%. The broker will require you to deposit 10% or $10,000 to buy the contract ($100,000 x 10% = $10,000).
References
- Commodity Markets Outlook: April 2023 https://openknowledge.worldbank.org/server/api/core/bitstreams/686 4d537-d407-4cab-8ef1-868dbf7e07e2/content
- Commodity Trader: Definition, What They Do, Where They Trade https://www.investopedia.com/terms/c/commodity-trader.asp
- Margin Account https://www.investor.gov/introduction-investing/investing-basics/glossary/margin-account
The information provided in this article is for general informational purposes only and does not constitute financial advice. It is not intended to be a recommendation to buy or sell any financial instrument or engage in any investment activity.
While we strive to provide accurate and up-to-date information, we do not guarantee its completeness or accuracy. We rely on various sources for the information presented, and we cannot guarantee the reliability or accuracy of these sources.
The information provided here does not necessarily reflect the products or services offered by our company. Any mention of financial products or services is for informational purposes only and should not be considered an endorsement.
All investments involve risk, including the potential for loss of principal.
This information should not be considered as financial advice. You should always seek professional financial advice from a qualified advisor before making any investment decisions.
