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How to Trade Commodities

how to trade commodities

Disclaimer: The products or services discussed in this article may not be offered by Taurex and may only be listed here for educational purposes.

 

Commodities have become essential to people’s lives because they are a basic commercial good. Traditional examples of commodities include gold, oil, grains, beef, and natural gas.

When it comes to precious metals, gold, platinum, and silver are among the world’s most valuable commodities.

These facts show that commodities are important resources that you can trade. If you’ve been buying and selling stocks or foreign currencies and want to explore other financial instruments, consider entering the commodities market.

But how does trading work? What commodities can you trade?

This article discusses what commodities are, how trading them works, and how traders can buy and sell these assets.

This article also explores the factors that can drive price movement in the commodities market. It also discusses the strategies you can use to improve your profitability in trading commodities.

Taurex is an online trading platform that offers opportunities to trade more than 1,500 financial instruments across commodities, forex, shares, metals, cryptocurrencies, and indices.

 

Discover How Commodities Trading Works

Commodities trading works similarly to trading on other markets: you transact with other buyers and sellers to exchange goods. What makes the commodities market different is that you can buy and sell commodities at current and future prices.

 

Trading Commodity Futures

A commodity futures contract obliges you to buy or sell an underlying commodity at an agreed-upon future price and date.

Most such contracts close at their expiration date. The price difference between the initial and closing trade is cash-settled, meaning the cash position is transferred instead of the actual underlying asset.

 

Trading Commodity Spot Prices

While futures prices typically indicate the market’s prediction of a commodity’s value when the future expires, spot prices show how much the asset is worth at present. When trading spot commodities, transactions are settled within just a few days.

Trading Commodity Options

When trading commodity options, you are granted the right but not necessarily the obligation to exchange an asset at a specific price on a predetermined date.

Trading or Investing in Stocks and ETFs

Trading stocks and ETFs (exchange-traded funds) gives you the option to go long (buy) or short (sell) on the market price.

On the other hand, investing means you enter a position hoping for a long-term price increase.

Are You Ready to Trade Commodities? Take Your Position in Just Three Steps

Many industries use commodities as inputs in the production of goods and services. However, you can also buy and sell these assets and profit from their price movement. The sections below explain how to trade commodities.

Choose a Commodities Market to Trade

When choosing a market to trade, you can directly select from trading commodities like gold and oil or through ETFs and commodity-linked stocks.


Which Commodities Can You Trade With Taurex?
Taurex offers trading opportunities across metals and soft commodities listed in the following sections:

Hard Commodities
  • Gold vs. US dollar (USD)
  • Silver vs. USD
  • Palladium vs. USD
  • Platinum vs. USD
Soft Commodities
  • Brent oil (UKOIL)
  • WTI oil (USOIL)
  • Natural gas (XNGUSD)
  • Cocoa
  • Coffee
  • Cotton
  • Gasoil
  • Sugar
Commodity Stocks

Some companies are involved in the processing of natural resources and become suppliers of these materials. When these companies trade in the stock market, you can call them commodity stocks.

Commodity ETFs

ETFs that allow you to invest in physical commodities like precious metals, agricultural products, and natural resources are called commodity ETFs.

Decide Whether to Trade or Invest

Before deciding between trading or investing, you should know what these actions entail. Trading involves buying and selling financial instruments in the short term, ranging from several minutes to a few days.

Meanwhile, investing involves buying and holding a position for months or years with the hopes of the asset increasing in value over time.


Spot Prices
The current price at which you can trade an asset is the spot price. Spot trading means you buy or sell a commodity at the quoted price instead of a future price.


Trading vs. Investing in Commodities
If you want to profit from small but frequent gains, consider commodities trading.

However, you can invest in commodities to diversify your portfolio beyond stocks and forex and minimise potential losses affecting these markets.

Commodities Trading: An Overview

Whether you’re a trader or investor, commodities can be a way to diversify your portfolios aside from stocks or forex. Commodity prices can move in the opposite direction of stocks, so you can also consider relying on commodities when the stock market is volatile.

A History of Commodities Trading

Trading commodities has existed since ancient times and has a longer history than stock trading. Many empires have risen thanks to their ability to create trading systems that thrive on commodity exchange.

Fast forward to today, people buy and sell commodities through an exchange, a physical location where commodities trading takes place. These exchanges are legal entities that enforce the trading rules of standardised commodity contracts and relevant investment products.

What Are Commodities?

Commodities consist of natural resources or agricultural products typically categorised as mined, processed, grown, or reared. 

Grown or reared commodities, also called soft commodities, include wheat, coffee, meat, and cotton products. Meanwhile, mined or extracted goods such as coal, oil, precious metals, and gas are hard commodities.


Commodity Trading
Commodity prices vary depending on supply and demand. If demand rises, or supply decreases, or both, the price of the commodity will increase.

For example, an increase in the demand for electric cars may lead to a rise in the cost of lithium, a key component in car batteries.

Other examples are the skyrocketing oil and gas prices due to a supply reduction caused by Russia’s invasion of Ukraine in 2022 and operational issues in Libya and Norway.

What Is Commodity Trading?

As with shares, commodities are sold and bought on exchanges, like the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), and London Metal Exchange (LME).

What Is Leveraged Commodity Trading?

Leverage or margin trading allows you to buy and sell commodities by funding a percentage of the contract’s value.

Suppose a trade requires you to deposit 10% of a gold futures contract worth $10,000. You only need to fund $1,000 ($10,000 x 10% = $1,000). Still, you must keep a minimum balance in your account based on your trade’s predicted value.

If the price goes toward the opposite direction of your desired position, you may be prompted with a margin call. This event occurs when your account runs low on funds, and you must deposit additional money to cover the margin.

Margin trading can be tempting because it has the potential for higher profits. However, the opposite is also true because it can increase your potential for losses.

How Does Commodity Trading Work?

Commodity trading usually involves buying and selling raw materials through futures contracts, exchanges, or over-the-counter (OTC) transactions.

Traders agree on prices months in advance. These exchanges standardise the commodity’s minimum quantity and quality.

For example, one commodity exchange can require one wheat contract to consist of 5,000 bushels and specify what wheat grades can satisfy the contract. All wheat that meets these criteria will sell for the same price, regardless of slight quality variations and where the wheat was grown.

In the physical commodities market, you can exchange goods physically. If you’re a corn supplier, a cereal producer can buy a futures contract from you with a delivery date months in the future.

Buying commodities under a futures contract can protect buyers if the commodity’s future market price exceeds the agreed price. This guarantee offered by such contracts allows both parties to plan and budget trades confidently.

Should You Invest in Commodities?

Investing in commodities diversifies your portfolio and potentially hedges it against inflation. When the stock market experiences a downturn, you can switch to commodities as an alternative.

However, do your research before trading. Understand the underlying factors affecting commodity prices and be comfortable with short-term losses in pursuit of long-term gains.

Key Takeaways

Traded commodities fall under one of four categories: metal, livestock and meat, agricultural, and energy.

Despite their profit potential, commodities can be risky investments. Unpredictable circumstances like unusual weather patterns, natural and manmade disasters, and epidemics can affect the commodities’ market supply and demand.

Commodities vs. the Stock Market

Commodity prices usually fluctuate due to supply and demand changes. For example, when farmers reap a large harvest for a particular crop, the prices for that produce will decrease. Alternatively, a drought that causes that crop’s supply to drop can lead to price hikes.

Stock prices also fluctuate due to supply and demand. However, other factors like the company’s financial health and the country’s economy can also influence stock prices.

Still, some commodities, like gold, are relatively stable. Gold is a good portfolio diversifier and can act as a hedge during inflation and deflation.

Commodity Futures vs. Cash/Spot Prices

If you’re a commodity trader, you can speculate on the value of raw materials through the following:

  • Spot (cash) contract: Implements a fixed price for immediate payment and delivery.
  • Futures contract: Establishes an agreed price to settle the trade at a future date.

Types of Commodities

There are different forms of commodities. The following sections discuss some of these categories to familiarise yourself with potential commodities you may want to trade.

Metals

These commodities include gold, silver, copper, and platinum. During volatile or bearish market periods, you can invest in precious metals. Investing in gold may be a sound decision as it is a reliable metal with real value.

You can also invest in metals as a hedge against currency devaluation or high inflation periods.

Gold

Gold is one of the most preferred traded commodities because its price tends to increase during economic and political uncertainty or when major currencies like the U.S. dollar or the British pound underperform.

Copper

Across the globe, copper is in high demand because the precious metal is essential for producing electrical goods like televisions, radios, air conditioners, and home heating systems. 

The strength or weakness of importing nations often determines copper’s value. When major copper importers have a strong economy, demand for this metal may increase, meaning prices will likely increase.

Energy

If you want to trade in the energy sector, be aware of any economic downturns and changes in production, such as those enforced by the OPEC (Organization of the Petroleum Exporting Countries).

You should also watch out for technological advancements in alternative energy sources like wind, solar, and biofuel, as they may replace crude oil as a primary energy source. These advancements can significantly impact the market prices for energy sector commodities.

Oil

Oil is among the most in-demand commodities worldwide, so it makes sense that this asset class is an essential commodity to trade.

Supply and demand, usually controlled by OPEC, primarily determine oil prices.

For instance, economic sanctions on major oil-producing nations or rising tensions in oil-supplying regions can result in increased oil prices.


Natural Gas

Like oil, natural gas is among the commodities with many commercial and industrial applications. Aside from supply and demand, geopolitical events can influence natural gas prices.

For example, when countries ban or reduce natural gas imports from major natural gas suppliers, these countries may have difficulty looking for suppliers elsewhere. This situation can lead to prices increasing.

Agricultural

Agricultural commodities include rice, wheat, corn, soybeans, coffee, cotton, sugar, and cocoa. Seasons can affect the prices of specific agricultural commodities, such as grains in the summer months or weather-related transition periods.

If you want to invest in the agricultural sector, you should learn how to determine profit opportunities despite shifting commodity prices. There are several factors that you should consider, like population growth and agricultural supply.


Sugar
If you want to trade soft commodities, sugar is one good option.

Historical data shows increasing average prices from $0.1235 per pound of sugar in 2019 to $0.1880 in 2022. Meanwhile, sugar prices in the United Kingdom traded from £0.23 per kilogram in December 2019 to £0.37 in March 2023.

Hard vs. Soft Commodities

Commodities have two categories:

  • Hard commodities: Include mined or extracted natural resources like oil, gold, and rubber.
  • Soft commodities​: Consist of agricultural products like coffee, wheat, or corn.

What Are the Different Types of Traders?

Depending on the category of the commodity you are trading, you can be classified into any of the following types of commodity traders:

Agricultural Traders

Agricultural commodities usually function as food sources for the global market and consist of staple products like grains, livestock, and dairy. Lumber also qualifies as an agricultural product.

Factors like population growth, technology, global demand, and global warming often influence agricultural trading, so pay close attention to them when trading products in this market.

Precious Metals Traders

Governments, hedge funds, and banks are among the large entities that often buy precious metals. Trading these commodities during financial crises like inflation can help with the detrimental effects of the economic situation.

So, if there’s political instability or global inflation, you can buy gold to hedge against stock market risks. Buying this metal can also diversify your portfolio risk. 

Unlike fiat currencies (government-issued money without physical commodity backing)​, gold maintains its purchasing power even during market instability or prolonged inflation.

Energy Traders

Like the oil markets, the energy market can also be impacted by world events and politics. If you’re planning to get into the energy trading industry, it may be wise to monitor news and economic releases affecting the energy sector.

In addition to traditional energy commodities like natural gas, heating oil, and gasoline, you can also trade renewable energy.

What Drives Commodity Prices?

Supply and demand are two of the most significant factors influencing commodity price movement. However, other elements like weather and currency fluctuations can also impact prices. The following sections discuss these factors.

Demand

Factors such as changing consumer habits and economic health can drive demand for a commodity.

For instance, changing lifestyles and a preference for healthier food alternatives may affect the demand for sugar. The need for this commodity can decrease when people consume less sugar, potentially leading to lower prices.

Supply

Several factors, like government intervention, weather, and even war, can influence a commodity’s supply.

Suppose a terrorist attack damages one of the major oil-processing plants in one of the largest oil-exporting countries in the Middle East. Such a circumstance can cause global daily oil production to plummet by several million barrels. This drop in supply can trigger a surge in oil prices. 

Physical Consumption

Manufacturers and other consumers can directly use commodities. This direct consumption is one of the primary price movers. Let’s say you have a coffee business. If you need to purchase coffee in large quantities, but the coffee supply is low, you will have to pay more.

Alternatively, if you have a surplus of coffee that you’re ready to sell, but the demand is low, you’ll likely need to reduce prices to attract buyers.

Production Changes

Supply fluctuations can impact commodity markets significantly. Suppose a gold mine is almost exhausted and must reduce its output, or a severe drought causes a decrease in farmers’ harvest. In such cases, supply decreases, and the price rises.

Conversely, miners may discover a new mine, or plantations may implement a new farming method that may help increase crop yield. The corresponding supply increase can cause prices to fall, especially when demand is insufficient to balance the surplus.

Currency Movements

Most commodities markets trade in U.S. dollars, but some brokers accept deposits in euros or British pounds. Changes in these currencies’ value may affect commodity prices.

Suppose the British pound rises against other currencies. Commodities can become more expensive for buyers who have to convert their currencies into pounds, which can reduce demand. If you trade in dollars and the value of the British pound falls, commodities may become cheaper, increasing demand.

Geopolitical Environment

Political developments can affect commodity supply, and the production of some of these goods is often limited to specific regions or countries.

For example, one country imposes sanctions limiting another nation’s crude oil export. Such limits can reduce the supply of this commodity, potentially leading to higher prices.

Economic Activity

A country’s economic growth rate can drive the demand for raw materials and other commodities. As the economy grows, the citizens’ purchasing power increases, leading to higher demand for products and services.

Transportation and Storage

Shipping, rail, and truck freight costs may seem irrelevant to people outside the shipping and transportation industry. However, these expenses can still affect commodity prices. Disruptions like extreme weather conditions or worker strikes can increase commodity prices.

Alternatively, selling the commodity within your local area may help reduce prices since transportation costs are relatively minimal.

If you trade crude oil, an oversupply may lead to oil companies using tankers as floating storage at sea. This occurrence may reduce the tankers’ availability and increase shipping rates.

Weather

Adverse weather conditions can have a significant impact on a range of commodities.

For example, hurricanes, tornadoes, and heat waves can damage harvests, hamper gas and oil production, disrupt mining activity, and cause logistics problems. Such conditions can reduce supply and drive prices up.

Cold weather can also increase consumers’ energy demand and raise prices. Meanwhile, good weather can help yield more crops, possibly resulting in an agricultural commodity oversupply.

Seasonality

Some commodities’ supply and demand levels change according to the season. For example, energy demand for heating can rise during winter and decrease during summer.

In some countries, the demand for metals for jewellery can increase during festivals and wedding seasons. The supply of agricultural products can also depend on when suppliers harvest their crops.

What Are Some Advantages and Risks?

Trading commodities may provide the following benefits:

  • Diversification: Commodities provide plenty of opportunities to diversify your trading or investment portfolio. When you have other asset classes that do not perform well, commodity markets may provide some degree of diversification to help mitigate your losses.
  • Liquidity: The commodity market is generally highly liquid (easily convertible to cash) compared to other assets like penny stocks or real estate, which can take time before you can sell them.
  • Volatility: You can perceive volatility as a benefit, whether with commodities or other financial markets. Volatility is an advantage if you can predict when a commodity’s price will shift.

Despite these advantages, commodities trading can expose you to the following risks:

  • Demand: The demand for commodities like gold and oil can be difficult to predict, and incorrect speculation can result in a losing trade. This difficulty can make demand a significant risk for commodity traders.
  • Commodity value: Technology can help make some processes more efficient or create better products at a lower cost, causing some commodities to decrease in value.

For example, while silver was a part of silver-based imaging in photography films, the rise of digital cameras that do not use these films lowered the demand for silver, causing the metal’s price to fall.

  • Volatility: Although you may see volatility as an advantage, it can also be risky because it can mean your trade can go the other way.

Placing stop-loss orders can help prevent or lessen your losses in these events.

Trading Costs

Your trading profit isn’t determined by the difference between your trade’s buying and selling prices alone. You should also consider the costs connected to trading.

If you trade commodities, consider the following costs when computing your profit:

  • Spread: The spread is the difference between a financial instrument’s bid (buy) and ask (sell) prices.

Suppose the bid price of gold is 1,975.35, and the ask price is 1,975.55. The spread should be 0.20 (1,975.55 – 1,975.35 = 0.20). To profit from this trade, you must not go below this spread.

  • Swap: Some brokers impose this fee on trades that you leave open overnight.
  • Commission: Brokers can also charge a commission on opening and closing trades. Still, some commodity markets and trading accounts have zero commission and instead charge on the spread.

Commodity Demand – WTI Example

As discussed earlier, numerous factors can influence the demand for a commodity.

One example is how the West Texas Intermediate (WTI) crude oil price went from nearly $65 per barrel to negative in only four months in 2020. Although several factors may have influenced this price drop, the COVID-19 pandemic may have significantly decreased oil demand.

Relationship Between GBP and Commodities

If you’re trading using British pounds (GBP), you may need to convert your currency to USD before trading commodities. The U.S. dollar is the world’s official reserve currency. With this status, it is unsurprising that many international markets use USD when pricing commodities.

If the dollar’s value drops against other currencies like GBP, you must pay more dollars to purchase commodities.

Commodity Substitution

Substitution happens when markets look for cheaper alternatives whenever possible. If a particular commodity becomes expensive, you should look for more affordable options.

Some traders who find a suitable alternative may start purchasing that commodity. Doing so may reduce the demand for the previous asset and decrease its price.

For example, as the price of copper increases, many manufacturers may start looking for and switching to other metals, such as aluminium, to help lower the costs.

Find a Commodity Opportunity

One of the ways to help you identify a trading opportunity is to be on the lookout for breaking news and your target price levels.

Taurex can help you find these opportunities through the following features.

Expert Analysis

Many brokers like Taurex give you access to various trading insights from our expert analysts to help inform and improve your trading experience.

Technical Indicators

Technical analysis indicators can help determine when you should enter or exit trades to make a profit. These indicators look at price information and translate it into easy-to-read signals telling you when to buy or sell.

Trading Alerts

When your trades meet specific conditions, like hitting a particular price level, trading alerts notify you automatically when to enter or exit a position.

Trading Signals

These signals provide actionable buy and sell suggestions based on expert analysis. Taurex offers real-time trading alerts to help you capitalise on market movements and quickly modify your strategy.

Open Your First Position

After learning how commodity trading works and how to open and fund your account, it is time to open your first position.

First, choose whether to buy or sell a commodity depending on what asset you believe will experience a rise or fall in price. Next, decide on your position size, which will determine how much you’ll pay.

Also, consider how you’ll mitigate risk in case your trade does not go well. Place stop-loss or limit orders to automatically enter or exit a position once your chosen commodity reaches a specific price level.

How Can You Trade in Commodities?

One popular way to trade commodities is through futures contracts, which oblige you to buy or sell assets at a fixed price and future date.

Because these contracts expire, trading commodities through futures is usually a short-term transaction instead of a long-term investment.

When trading commodity futures, you usually refer to them by their expiry month. If a contract ends in August, it is an August futures contract. 

Buyers and sellers use futures contracts to lock in a commodity’s price now for future delivery.

Investing in Physical Commodities

You can go directly to a particular commodity’s supplier to buy physical goods like oil, sugar, or gold. If prices rise over time, you can find a buyer and sell that commodity to them for a profit.

Whether buying or selling the physical commodity is feasible depends on several factors, like the commodity type, storage, transportation, and whether you can find a producer or seller immediately.

Using Futures to Invest in Commodities

A futures contract is one way to invest in commodities. This contract is a legal agreement between traders to sell or buy securities at a fixed price and time.

The futures contract buyer takes on the obligation to purchase and receive the underlying commodity when the contract expires. 

Meanwhile, the futures contract seller provides and delivers the underlying commodity upon the contract’s expiration date.

Livestock and Meat

Because futures have expiry dates, you can consider using these contracts to purchase soft commodities like livestock and meat, including live cattle, lean hogs, and pork bellies.

Using Stocks to Invest in Commodities

If you enter the market to invest in a particular commodity, consider investing in the stocks of companies associated with those assets.

Suppose you want to invest in stocks related to gold. In this case, buy stocks of mining companies, refineries, or firms that deal with bullion (gold or silver in physical form, like bars, coins, or ingots).

Using ETFs and Notes to Invest in Commodities

Other ways to invest in the commodities market are through ETFs and exchange-traded notes (ETNs). ETFs and ETNs trade like stocks and allow you to profit from commodity price fluctuations without requiring you to invest directly in futures contracts.

Using Index and Mutual Funds to Invest in Commodities

If you prefer having a professional fund manager trade on your behalf, consider investing in mutual funds. These funds can consist of stocks in commodity-related industries like energy, mining, or agriculture.

Just as factors affecting the stock market can impact stock prices, fluctuations and company-specific factors in this market can also affect mutual funds containing commodity-related stocks.

Using Commodity Pools and Managed Futures to Invest in Commodities

A commodity pool operator (CPO) is an individual or limited partnership entity that gathers investors’ money into one pool to invest that money in options and futures contracts.

If you participate in a CPO, you can benefit from professional advice from a commodity trading advisor (CTA). Additionally, the pooled structure provides more money for the fund manager to invest and grow.

What Are Commodity Derivatives?

Commodity derivatives are investment tools that allow you to profit from commodities without possessing them. The following sections discuss some of these derivatives.

Spread Betting Commodities

Some brokers allow commodity traders to open a spread betting account to trade in the commodity markets. If you want a tax-efficient trading method, consider spread betting, as it is free from stamp duty and capital gains tax.

One limitation of spread betting is that it is only available to U.K.- or Ireland-based traders. If you are from the U.S., you should look for other ways to trade commodity derivatives.

Commodity ETFs

Commodity ETFs let you invest in physical commodities and track the performance of these materials through spot or future contracts.

How to Make Money From Commodities Trading

When trading commodities, you must assess whether the asset’s price will rise or fall. How you achieve this goal depends on what financial instrument you choose to trade, whether commodity-related stocks, futures, options, or ETFs.

Suppose you’re trading commodities for the first time. After researching the market, you predict that gold prices will increase and decide to invest $2,000 in this asset.

Suppose your prediction is correct, and the price of gold increases by 10%. If you cash out, you gain $200 from the trade ($2,000 x 10% = $200).

Commodity Trading Hours

The exchange where you trade commodities is usually responsible for setting the trading hours. If you are from a different country, consider adjusting your time to coincide with the exchange’s local time zone.

For example, you can buy and sell oil futures 24 hours daily, but trades may be subject to restrictions specific to the exchange. Trading hours can also depend on the broker with which you sign up.

When Is the Best Time for Trading Commodities?

The preferred time of day to trade varies by commodity, exchange, and traders’ circumstances. The most active commodity trading times often see high trading volumes.

For example, Taurex trades WTI oil (USOIL) and sugar from 1:00 AM to 11:59 PM, while coffee trades from 3:00 AM to 11:59 PM.

How Weather Affects Commodity Prices

Weather can influence the prices of some commodities. For instance, abnormal or sudden weather changes like drought or heavy rains can significantly affect agricultural commodities.

Specific commodities like coffee and cocoa have farming and harvesting periods that need consistent weather cycles. Such cycles allow you to predict, with some degree of accuracy, how the prices of these commodities will move.

Weather can also influence energy commodity prices. The cold weather during winter can increase the demand for heating, which may also increase the demand for natural gas and heating oil and increase their prices.

Commodity Trading Strategies

If you’re just learning about commodities trading, some concepts essential to becoming a better trader can be too complex for beginner traders. Approach this market with a clear trading strategy in mind.

Below are some well-known commodity trading strategies you should consider practising before trading using real money.

Geopolitical Analysis

Allocate time to keep yourself updated with key news and developments regarding geopolitical events. This way, you can assess whether a commodity’s value will rise or fall.

For example, political developments affecting major oil-exporting countries may affect the global oil supply, resulting in the possibility of oil price hikes.

Output Figures and Stockpiles

Another strategy that may help you trade commodities effectively is keeping tabs on commodity-related companies’ publicly released output figures and stockpiles.

Output figures refer to the amount of goods produced over a specific timeframe. For example, an oil mining company reports the number of tonnes of oil produced for the month.

Stockpiles are the amount of a commodity a corporation or government holds. If a country that stocks gold reserves releases them suddenly, this decision can significantly impact this precious metal’s value.

Gold’s value can increase if major economies start stockpiling this commodity, suggesting that it is likely in high demand worldwide.

Day Trading Commodities

The main objective of the day trading strategy is to spot short-term trading opportunities within the day.

With this strategy, you enter a position by buying or selling a commodity and closing the trade a few hours or minutes later. If your move succeeds, you can make small but frequent gains.

Day trading may seem complicated if you’re not used to trading that lasts for less than a day. You can minimise your risks by setting stop-loss orders.

Look for Support and Resistance Levels

A support level is a specific price where an asset attracts interest from investors. When a commodity goes through a short-term downward price movement, the support helps ensure that the asset’s valuation doesn’t continue declining.

Meanwhile, resistance represents a price level preventing a commodity from increasing in value.

You can enter suitable and potentially profitable positions by identifying verifiable support and resistance levels in your analysis.

Learn Technical Analysis

Technical analysis involves analysing a commodity’s short- and long-term pricing chart.

You can utilise numerous technical indicators to help you evaluate factors affecting a commodity’s volume, support, resistance, volatility, and price.

However, you must understand how these indicators work to know which fits your trading style best. Doing so lets you make informed decisions to help you profit from your chosen commodity’s movement.

Technical Strategy

Technical analysis uses chart indicators to track price movements, identify patterns, and determine buy and sell signals. You can utilise these indicators in your trading strategy to help you identify price patterns.

Each strategy incorporates technical indicators in various ways. Learn and practise these strategies and indicators before using them in real-money trading.

Price Action Trading

A price action-based strategy tracks a commodity’s historical price movement to predict how the asset’s price will move. Commodity markets are usually highly liquid, allowing you to respond quickly to price volatility. 

If you’re a quick decision-maker, price action trading may suit you well since you don’t need to wait for technical indicator signals that can lag behind real-time price movements.

Trend Trading

Trend or position trading is a long-term approach that can sometimes last months. As a trend trader, you speculate on a commodity’s directional price trends. You can enter a long position when a price trends upward or go short when a commodity’s price trend is downward. 

Trends often take time to manifest, so consider analysing fundamental factors like company performance and economic conditions more than technical indicators. Also, consider looking for trend reversals to determine when to exit a position.

News Trading

A news trading strategy follows news events that may affect commodity prices. These events include geopolitical developments, natural disasters, and extreme weather conditions.

Position Trading Strategy

Also called trend trading, position trading involves following long-term price trends instead of looking into short-term volatility.

Range Trading

This trading strategy involves identifying support and resistance levels using technical analysis indicators like Bollinger bands (a charting tool characterising volatility and prices over time) and other charting methods.

As a range trader, you can buy when the price is near the support level (bottom of a range) and sell when the price approaches resistance (top of a range).

Breakout Trading

A breakout strategy helps you focus on short-term price movements and profit from a commodity that breaks out of its recent trading range. You can buy before the price increases or sell before it drops lower. 

Use this strategy with range trading, such as when an asset’s price moves above the resistance or below the support level. Still, breakouts can happen anytime, meaning you don’t have to limit your trading to those levels.

Fundamental Trading

Fundamental trading involves analysing market fundamentals affecting supply and demand instead of using only technical indicators to predict price movements.

For example, a fundamental trading strategy for crude oil may require you to sell the asset in response to recession signs that may reduce demand.

Why Trade Commodities?

If you are still deciding whether commodity trading suits you, consider the benefits discussed in the following sections.

Great for Short-Term Trading

Commodities are usually unsuitable for long-term investments because many goods, like oil and gold, tend to operate in seasonal or cyclical markets.

Prices usually go up or down depending on numerous drivers like supply, demand, geopolitical events, weather, and population growth.

If day trading or other short-term strategies interest you, consider commodities as one of the asset classes to trade.

Hedge Against the Stock Markets

Traditional stock markets can experience economic downturns like recessions. One way to hedge against potential losses from these markets is by trading commodities.

For example, when stocks are down due to economic turmoil, you can consider trading gold to limit your losses or profit from the downturn.

More Suited for Fundamental Analysis

When doing short- to medium-term trading using commodities, stocks, forex, or cryptocurrencies, you can apply technical analysis to determine when and what assets to buy and sell.

However, since external factors like demand, supply, and geopolitical events can affect commodity prices, you may also want to do a fundamental analysis. Some traders combine technical and fundamental analysis to make informed trading decisions.

Trade on Margin

Many commodity brokers will enable you to trade on margin, meaning you only need to pay a fraction of the full trade value upfront.

Trading commodities on margin allows you to boost your potential gains. However, proceed cautiously because margin trading can also magnify your losses if the trade doesn’t go your way.

Population Growth

Population growth can create demand for more infrastructure, potentially leading to a greater need for commodities like metal and energy.

More people also means more mouths to feed, which can affect the demand for agricultural commodities. Thus, a higher population leads to more demand, meaning commodity prices will likely increase over the long term.

Inflation Hedging

Inflation is the rate at which prices increase, meaning your money today will have a lower purchasing power in the future. This decrease in buying power means you will need more cash to purchase the same amount of a given commodity in the future.

Investing directly in commodities can protect you from these price increases. You can also benefit from selling the commodities at a higher price in the future.

Portfolio Diversification

Some investors have yet to diversify their portfolios. However, those who already do may still stick with stocks or bonds.

The issue with limiting yourself to these markets is that if they encounter a downturn, such as when the stock market crashes, your portfolio will take a substantial loss.

When diversifying, consider investing in different asset classes to help spread the risk and insulate your portfolio.

“How Do I Improve My Commodity Trading Results?”

Suppose you already understand how commodity trading works. Still, your trades aren’t hitting your profit goals. The following sections explain how to improve your commodity trading skills.

Get Educated

Some brokers provide access to a wide range of resources to help kickstart your trading journey. These resources include free webinars, courses, and seminars to increase your knowledge about commodity trading.

A demo account is an excellent way to learn trading, including understanding how markets work and familiarising yourself with the mechanics of opening and closing trades.

Analyse the Commodity Market

Commodity analysis typically falls under two categories: fundamental and technical analysis.

Fundamental analysis focuses on analysing economic factors influencing commodity prices. If you are not a full-time trader with a team of research analysts at your back, tracking news and current events affecting market prices can be challenging.

To help address this difficulty, consider using technical analysis to help with your trading decisions. Technical analysis involves looking at patterns and indicators on a price chart for clues on a particular commodity’s direction.

Manage Your Risk

Buying and selling commodities with leverage allows you to access large positions even with a relatively small deposit, potentially amplifying your profits.

However, you must also remember that leverage can magnify your potential losses, meaning your risk increases as leverage increases.

The following tips may help you manage commodity trading risks:

  • Use stop-loss orders to exit a losing position automatically.
  • Manage your money effectively. Do not trade more than what you can afford to lose.
  • Follow a clear strategy. Stick to a solid plan of when to enter and close trades.

Diversify Your Portfolio With Commodities

If you’ve heard the expression, “don’t put all your eggs in one basket,” this saying means you should not put all your funds into one asset or market. If that asset’s or market’s value drops, you can lose a substantial amount.

Instead, build a portfolio consisting of a mix of asset types. For example, your portfolio can contain the following:

  • Metals like silver, gold, and platinum
  • Energy commodities like oil and natural gas
  • Agricultural commodities like sugar, coffee, and cocoa
  • Shares from various markets from the U.S., Asia-Pacific, and Europe
  • Indices representing entire markets
  • Bonds

Stocks for Trying to Build Wealth After 50

When you’re over 50, you should consider investing in stable and well-performing stocks. Without exerting much effort, you also keep your investment relatively low-risk.

For example, index stocks may be a suitable investment. Indices usually serve as benchmarks that you can use to compare and evaluate the performance of your portfolio’s returns.

Some stocks and their corresponding ticker symbols (letters representing the shares traded in the stock market) you can invest in after reaching the age of 50 include the following:

  • Microsoft Corporation (MSFT): One of the world’s largest software companies known for its Windows operating system.
  • JPMorgan Chase & Co (JPM): The largest U.S. bank based on market capitalisation.
  • Cisco Systems (CSCO): A tech company that designs and sells a broad range of networking, security, collaboration and cloud technologies.
  • Verizon Communications (V.Z.): The largest U.S. wireless carrier.
  • Broadcom Inc. (AVGO): A supplier of semiconductor devices.

Why Trade Commodities With Taurex?

Taurex offers leverage ratios of up to 1-to-500 for metals like gold and up to 1-to-200 for other commodities like Brent and WTI oil. These ratios mean you can trade commodities worth more than a hundred times your deposit.

Taurex offers advanced trading tools to let you make informed decisions and improve your strategies. You also gain access to expert insights and economic calendars to help you trade more confidently.

How to Place a Commodity Trade on Taurex

Taurex lets you trade commodities once you open a Standard Zero, Pro Zero, or Raw trading account. To place your trades, use Taurex’s intuitive app, MetaTrader 4 (MT4), or MetaTrader 5 (MT5) platforms and use their technical indicators, charting tools, and one-click trading.

Risks of Trading Commodities

Price risk is the likelihood that changes in commodity prices will cause economic losses.

If you’re a buyer, commodity price risk is due to price increases. If you’re the seller, commodity price decreases can increase such risk.

Consider trading futures and options to help hedge your finances against commodity price risk.

Other risks associated with commodities trading are the following:

  • Quantity risk: This downside occurs due to changes in the supply of commodities.
  • Cost risk: This risk arises due to adverse price movements that impact business costs.
  • Regulatory risk: This risk happens when legal and regulatory changes affect the availability or price of commodities.

Risk Management Strategies

The following methods allow you to manage commodity price risk when buying raw materials:

  • Supplier negotiation: The buyer proposes an alternative pricing plan to the supplier. The proposal can include lower prices for increased volume purchases or suggestions to change the supply chain process.
  • Alternative sourcing: The buyer finds an alternative supplier for the same or substitute product.
  • Production process review: The company regularly reviews the commodities used in the production process to change the product mix and offset commodity price increases.

FAQs on Trading Commodities

  • Is commodity trading profitable?

Trading commodities can be profitable if you understand the factors affecting their prices and implement the appropriate trading and risk management strategies. However, as with any trading, there are always risks of financial losses when trading commodities.

  • How much money do I need to start trading commodities?

The required amount you need to start trading commodities depends on your broker.

Taurex requires maintaining a minimum of $100 for a Standard Zero account. Meanwhile, a Pro Zero and Raw account require at least $500 for you to start trading.

  • Are commodities better than stocks?

Stocks and commodities are different asset classes with their respective benefits and risks. If you’re a long-term investor, you can consider investing in stocks. The volatility commodities offer may fit you better if you prefer short-term trading.

  • What is a commodity trader?

A commodity trader is involved in the exchange of raw materials. The mix of fundamental and technical analysis often drives the daily trading efforts of commodity traders.

If you’re such a trader, keep updated with the news on commodities to be aware of the environmental forces driving prices. Use technical analysis to make entry and exit trading decisions based on past trends.

  • Is commodities trading safe?

Although you can consider buying commodities like gold to help hedge your finances against adverse market conditions, these assets are still exposed to various risks, like price, quantity, and regulatory risks.

Developing a risk management plan can help you keep those risks under control and ensure that commodity trading is still a profitable venture for you.

  • How did the commodity markets develop?

Commodity trading dates back to ancient times, as far back as 4500 BCE (before the common era) in Sumer (modern-day Iraq). Traders often use clay tokens in exchange for farm animals like goats.

However, the commodities market you know today kicked off in the 19th century during the establishment of the Chicago Board of Trade (CBOT). At the start, CBOT offered commodity trading for wheat and corn and expanded later to silver and plywood.

Today, some of the largest commodity exchange markets worldwide are CBOT, New York Mercantile Exchange (NYMEX), London Metals Exchange (LME), European Energy Exchange (EEE), and Shanghai Futures Exchange (SHFE).

  • How do I buy and sell commodities?

You can buy and sell commodities through futures exchanges or broker platforms that offer futures and derivatives.

  • What are exchange-traded commodities (ETCs)?

ETCs are instruments you can buy and sell on the stock market like normal shares. This feature makes ETCs easy to buy and sell while removing the need for costly storage and insurance.

ETCs track the price of a commodity in two ways:

  • Physically holding the commodity 
  • Investing the commodity in derivatives

You can use physical ETCs to invest in precious metals like silver and gold by securing the metal bars in a vault.

Physically possessing the asset is not possible for many soft commodities. Wheat will spoil if held for a long time, and storing millions of barrels of oil can be costly for an individual trader. In this case, derivatives allow you to invest without owning the asset.

  • How do I buy ETCs?

Look for and open an account with a licensed broker that offers ETC trading. The way ETCs are structured depends on the company issuing the product.

Exchanges like the London Stock Exchange (LSE) and the Australian Securities Exchange (ASX) also offer ETCs.

  • How do beginners invest in commodities?

If you’re new to investing in commodities, you must learn the various goods you can trade in the commodities market. Afterwards, decide which ones you want to invest in.

Once you’ve researched, open a brokerage account that offers commodities trading and purchase commodity ETFs or shares in your preferred commodity-specific company.

  • Is it hard to trade commodities?

Trading commodities can be challenging, especially if you’re still getting used to the strategies you want to implement. If your strategy isn’t compatible with your trading style, profiting from this activity can also become challenging.

However, the right strategies and risk management methods may help improve profitability and keep your losses manageable.

  • How can you trade indirectly in commodities?

You have several ways to invest in commodities without directly trading in the underlying asset itself:

  • Exchange-traded products: ETFs and ETCs are among the indirect ways to invest in commodities. ETCs track commodity prices, while ETFs track an index’s performance. 
  • Collective investments: Investment trusts and commodity funds let you invest in a portfolio of companies supplying commodities like energy, agriculture, and precious metals.
  • Commodity-based company shares: companies producing, mining, or processing commodities benefit from rising commodity prices as these companies can sell products at a higher price.

 

Disclaimer: 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.

References

  1. Commodities Trading: An Overview

https://www.investopedia.com/investing/commodities-trading-overview/

  1. Precious metals worldwide – statistics & facts

https://www.statista.com/topics/1395/precious-metals/

  1. 8 Good Reasons to Own Gold

https://www.investopedia.com/articles/basics/08/reasons-to-own-gold.asp

  1. How the U.S. Dollar Became the World’s Reserve Currency

https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp

  1. What Is an Index? Examples, How It’s Used, and How to Invest

https://www.investopedia.com/terms/i/index.asp

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