Guide to Commodity Trading

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What are commodities?

A commodity is an essential good or raw material people use to meet their vital needs and produce more complex goods. The most commonly used commodities are oil, gas, wheat, corn, cotton, gold, silver, copper, aluminum, coffee.

What separates commodities from other goods is that they are mostly standardized. It means that two equivalent units of the same commodity will be identical, no matter where they are produced.

Why is commodity trading so popular?

Commodity trading has several advantages compared to trading stock, crypto, or Forex markets.

Great for Short-Term Trading

Commodities are highly volatile. This is an advantage for traders because there are plenty of everyday trading opportunities. It is possible to trade commodities in both directions, earning on both asset growth and downward price movement. Therefore, this type of asset is the most popular among scalpers and day traders.

Hedge Against the Stock Markets

Another reason why you might decide to trade commodities is the possibility of trading them as a part of a hedging strategy against the traditional stock markets. Commodities are fundamental for the global economy. Therefore, the changes in their prices are significant in times of growing tension. In times of crisis, when investors turn away from risk-on assets such as stocks and crypto, commodities gain the highest volatility.

For example, when stock markets are down because of economic or geopolitical fears, traders and investors turn their eyes to the gold market, hedging against the stock market’s downfall.

On the other hand, when the stock markets are about to recover, gold will suffer, as capital will move into equities. That’s why gold was one of the best-performing asset classes during the 2008 financial crisis.

More Suited for Fundamental Analysis

When attempting to profit from short-term price fluctuations, much of the focus goes to technical analysis. You will require great skills in technical chart analysis, which can take a significant amount of time to master.

However, the prices of commodities like gold, oil, and natural gas are often dictated by external factors that are much easier to evaluate.

For example, increased tensions in Ukraine at the end of February 2022 forced traders to turn to the metals market as they wanted to hedge against a possible collapse in stocks and cryptocurrencies. As a result, XAUUSD (gold) gained 8% within one week due to increased demand, which pushed the prices up.

Guide to Commodity Trading

So, even if you are only just learn to trade commodities online, you can give yourself the best chance of predicting some market trends simply by following the international news.

Leverage can boost gains

When trading commodities, you can use “leverage” to gain control over a larger amount of money with just a small deposit. It i’s an advantage because it can potentially increase your gains. On the other hand, leverage can also magnify your losses, so it’s important to use proper risk management and Stop Loss orders to limit the odds of losing money.

Types of commodities

Commodities are often classified as either “hard” or “soft.” Hard commodities are generally natural resources mined or extracted from the ground. Examples include gold, copper, and oil. Soft commodities are agricultural products or livestock grown or raised on a farm. Examples include sugar, cotton, and wheat.

However, traders usually divide commodities into three main categories: metals, energies, and agriculture. Let’s take a look at each of these categories.

Metals

Metal commodities are commonly used in manufacturing and construction. Some precious metals, such as gold and silver, are also used in jewelry and for investment purposes.

Examples of metal commodities include:

Gold
Silver
Platinum
Copper
Nickel
Aluminum
Palladium
Energies
Energy commodities play a crucial role in the global economy. Without energy sources, people would be unable to use transport, produce goods, heat their houses, or cook meals.

Examples of energy commodities include:

Oil (Brent, WTI)
Natural Gas
Agriculture

Examples of agricultural commodities include:

Sugar
Cotton
Cocoa
Wheat
Commodity Price Movements
In its most basic form, commodity prices fluctuations are based on demand and supply ratio.

If the global demand is higher than the supply, the price will rise. In the reverse situation, the price will fall.

What are commodities?

However, in order to determine what drives demand and supply, you need to have deeper understanding of the fundamentals influencing geopolitical and economic factors.

Supply

Key drivers of commodity supply include:

Government intervention. Governments can play a key role in commodity supply. For example, since 2020, the United States have been releasing oil from its strategic reserves to control supply in the domestic market and prevent oil price growth.

Geopolitical events. Conflicts between countries, terrorist attacks, trade wars, social unrest, and closures of important transport routes can reduce commodity supply and, hence, push the prices up.
The weather can also play a major role in the supply of agricultural commodities such as sugar, wheat, cotton, and cocoa. These kinds of commodities require consistent weather cycles for producers.
Example:

How to Start Making a Profit With Forex Trading

The Organization of the Petroleum Exporting Countries (OPEC) controls 2/3 of global oil reserves. Thus, it can have a great effect on oil prices. If OPEC wishes to increase global oil prices, it can collectively agree to reduce production. On the other hand, it can collectively agree to increase output levels to pull the prices down.

Guide to Commodity Trading

Demand
Key drivers of commodity demand include:

Health of global economy. During periods of strong economic growth, demand for many commodities tends to be high as there is more construction and manufacturing activity. Conversely, during periods of weak economic growth, commodity demand tends to be lower as construction and manufacturing activity declines.
Growth in the emerging markets. Fast-growing emerging market countries such as China and India are major sources of commodity demand. These countries need commodities to build infrastructure, fuel their factories, and feed their growing populations.

Guide to Commodity Trading

Trading commodities with CFDs

There are many ways to trade commodities. However, one of the easiest ways is using Contracts For Difference (CFDs). CFDs are financial instruments that offer traders and investors the opportunity to profit from the price movements of a security without actually owning the underlying security.

Trading commodities through CFDs has several advantages:

Oil

Oil is commodity is used in largest volumes globally, so it is only logical that it is a great asset class to trade.

As mentioned, oil prices are determined by demand and supply, which OPEC usually manipulates.

However, rising tensions in the Middle East or economic sanctions on major oil-producing countries like Russia and Iran can increase oil price volatility.

Natural Gas

Just like oil, natural gas is one of the most volatile commodities to trade. Moreover, natural gas prices are also dictated mainly by geopolitical events. With many western governments announcing that they will ban or reduce natural gas imports from Russia due to its invasion of Ukraine, this commodity has since seen a significant pricing rally.

Questions about commodity trading

What are Commodity Trading Hours?
Commodities are available to trade 24/5, opening on 00:00 GMT+3 on Monday, and closing at 00:00 GMT+3 on Saturday.

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