GUIDE | TRADING BASICS | BEGINNER
Commodity Trading: A Beginner’s Guide
earn the essentials of commodity trading, including what commodities are, why they’re popular among traders, and how to achieve success.
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What is commodity trading?
It describes the purchasing or selling of commodities. Transactions fall into two categories:
What Are the Different Categories of the Commodity Market?
In reality, the commodity market is not one marketplace. Rather, it’s various regulated futures exchanges. What happens in the exchange? Hedgers (commodity companies, retailers, or manufacturers) buy futures contracts created by the exchange. Their aim is to offset the risk associated with price changes. Speculators and traders look to buy low and sell high (or vice versa if going short).
In the past, most trading took place on the trading floor. Electronic trading now dominates. Examples of London commodity markets include the London Commodity Exchange (LCE) and London Metal Exchange (LME).
The most traded commodities, in order of popularity, include West Texas Intermediate (WTI) crude oil, coffee, natural gas, gold, Brent Oil, silver, sugar, corn, wheat, and cotton.
Commodities with the highest trading activity are the best commodities to trade as CFDs. They are highly volatile with high price swings. Various commodity markets include:
Trading Commodities with FXTM
With FXTM, you can trade energy commodities, including Brent crude oil, WTI crude oil, and natural gas, as well as precious metals such as gold and silver.
As you’re trading a CFD – a financial derivative – you don’t need to take ownership of the physical asset. You can simply speculate on whether the price of commodities will rise or fall, with opportunities to profit in both directions.
So, why trade commodities at FXTM?
- Leverage: Traders may open larger positions using the multiplication effect of leverage. For US natural gas, the leverage is up to 1:19 or 1:52 with US crude oil
- To diversify your portfolio
- Access to popular commodity markets
- Low margin requirements
- Competitive spreads ranging from 4 to 11 pips
What are agricultural commodities?
The agricultural commodities market is one of the most heavily traded. But trading oil takes first spot. Most of the trades take place around futures, options, and commodity indexes. Major categories include:
Grains & oilseeds: Products include corn, wheat, barley, oats, Black Sea corn, soybean, and rough rice.
Dairy: They are daily and milk products, including cash-settled cheese options, Class III milk options, non-fat dry milk options, and Class IV milk options.
Fertilizer: There's a thriving international global fertilizer business. The most-traded products include futures and cleared swaps, Urea (Granular) futures and UAN FOB NOLA Swaps.
Lumbers and softs: Lumbers refer to softwood from coniferous trees. Softs are coffee, sugar, and cocoa futures.
What are metal commodities?
Metal Commodities
Traders may buy and store gold bars or coins. Metal trading involves buying and selling futures and options. Indirect investments may entail buying and holding ETFs or joining mutual funds. A commodity ETF is also a stock market commodity, bought and sold like shares.
Metal commodity categories include:
Precious metals: The COMEX exchange is the leading marketplace for trading precious metal futures. They include gold, platinum, silver, and palladium. Precious metals are ideal for portfolio diversification or hedging against inflation. When the dollar is falling due to inflation, the price of gold increases due to demand.
Base metals: They are nonferrous (without any iron). Popular trading products include Copper Futures and Aluminum Futures.
Ferrous metals: The ferrous metals market ranks second after the global energy industry. Prominent products include steel and iron ore futures and options.
Livestock Commodities
Livestock commodity exchange entails trading futures based on the value of the underlying farm animals. Most trading revolves around cattle and pigs on markets such as Chicago Mercantile Exchange (CME).
The most traded futures commodities contracts on the CME exchange include:
Live cattle options - Cattle ready for slaughter and more than 1,050 pounds in weight.
Lean hog options - Hogs at about 250 pounds in weight and ideal for slaughter.
Feeder cattle options - Weaned calves not more than 800 pounds.
Pork Cutout options - Pork carcass cutouts, e.g., loins, ribs, or ham.
Livestock markets are particularly volatile. Many factors drive price changes, including weather, feedstock prices, seasonality of the livestock supply, transportation costs, threat of diseases, etc. For instance, rising meat prices may increase supply. Farmers may bring more animals to the market to take advantage of high prices.
Energy Commodities
Energy commodities present favorable opportunities for speculators and hedgers. Crude oil prices, for instance, tend to be highly volatile. Changing demand, the health of the economy, pipeline changes, and political events all affect the price of crude oil
Long-term events also influence global energy trends. For instance, the rising US oil production, increased Asian demand, population increases, and growth of developing economies.
Examples of energy commodities include crude oil, gasoline, heating oil, natural gas, ethanol, and uranium (for nuclear energy).
Popular commodities markets
You can trade energy CFD commodities on popular markets that include the below:
How to Trade Commodities
Choose a trading platform
Trading commodities as CFDs is ideal for beginners.
Choose a commodity asset
The platform should offer various commodity trading instruments. Find a commodity characterised by high-liquidity and stability. On FXTM, traders will access Brent Oil, WTI Oil, and Natural Gas.
Learn more about the commodity
An expert commodity trader seeks more information about the commodities markets in play. They learn what drives price movements. New traders may also take advantage of a commodity trading advisor. It's a tool or service that generates trading signals.
Open trades
Before spending real money, start with a demo account. Go long or short for the particular commodity trading instrument. Refine your trading system and master fundamental or technical analysis techniques. Use real money after developing a profitable system.
Keep your eyes on your open positions
Watch open positions. Avoid early exits on profitable trades or delayed exits on unprofitable trades.
Undated Commodities Vs. Commodity Futures
Commodity contracts specify the terms of delivery. For example, in commodity futures trading, contracts have a set delivery date in the future. Upon the expiry date the contract simply no longer holds or exists. When a futures contract expires, you can’t trade it anymore.
For example, if you have a futures contract and it expires, the supplier is obligated to deliver the commodities. In the case of oil, the trader may receive a delivery notice, informing of the collection point of barrels of oil.
Most futures contracts are closed or sold before the expiry date. Traders mostly sell off the futures to realise a profit or roll over the contract.
Undated commodities are contracts without expiry dates. They can’t expire because they don’t involve direct ownership of real assets, for instance, trading commodity CFDs. Some companies that participate in commodity futures markets may see the contract through the expiry date if they want to take ownership of the underlying assets, for instance, manufacturers or wholesalers.
How Can I Improve My Commodity Trading Results?
Improve your commodity trading results by implementing these tips:
Get Educated
Looking for the best commodity finance education? We have several recommendations. First, try the CME Group education courses. They are behind the largest commodities futures markets.
Go to their main website, and from the menu, choose the "Education" tab. Besides courses and lessons, they have training simulators and various challenges. You can also follow different markets and obtain detailed explanations of global commodities.
Ice Markets is a reliable source of information on the global oil market. Catch their monthly oil reports and learn about the global oil benchmarks. They also publish informative articles and podcasts about the oil industry.
Investopedia gives detailed explanations of various terms and topics. Closer to home, FXTM also publishes webinars and expert insights.
Analyse the Commodity Market
For success in world commodity trading, build up your market analysis skills. First, take advantage of fundamental analysis. It may involve monitoring and gauging the impact of economic news releases. Traders use an economic calendar for this purpose. Watch the economic health of a country, key oil producers, and geopolitics. Read market reports from trading exchanges, including ICE or CME.
For instance, meetings and announcements by OPEC have an immediate effect on oil prices. Why? Members of the trade organisation collectively account for 40% of the world’s oil supply.
Develop your fundamental analysis skills, too. Analysing charts to spot price patterns or trends provides short-term trading signals. You can learn more about:
- Momentum indicators
- Moving averages
- Scholastic indicators
- Relative strength indicators
- Bollinger bands
- Moving average convergence divergence (MACD).
Manage your risk
Speculating on price movements involves risking your capital. Using leverage also multiplies your risk. For proper risk management, when you trade commodities:
Set up stop-loss orders: The S/L restricts your losses to an amount you're comfortable losing on a trade.
Trailing stops: The trailing stop is essentially a moving stop-loss order that trails or follows the price movement. Rather than specifying a specific limit price, you place the trailing stop several points from the current price.
Risk vs reward ratio: It's the amount you stand to gain for each unit of currency invested. For instance, a ratio of 1:2 signifies that you might gain $2 for risking $1, or 10 pips for risking 5 pips. An ideal ratio is 1:3.
Diversify Your Portfolio with Commodities
If you're currently trading forex pairs, should you add commodities to your portfolio? What advantages does this commodity trading strategy bring?
Trading commodities with currency pairs may reveal a correlation in the prices. It's widely known, for instance, that the price of oil is inversely correlated to the US dollar. An increase in oil prices up to 10% may lead to a depreciation of the US dollar. A weakening US dollar may cause an increase in oil prices.
Certain currencies around the world are chosen as "commodity currencies." Fluctuating commodity prices and export values influence price movements of the currencies.
Retail traders looking to sell or buy commodities as CFDs will also appreciate that commodities are more volatile than currency pairs and stocks. They can greatly profit by making correct price predictions.
Use these rules to find the best commodities broker:
What commodities can I trade with FXTM?
Due to the presence of fees and high capital requirements, making investments may not suit most Forex retail traders.
Another approach may involve finding commodity companies in London. These companies may be directly engaged in the extraction or supply of various commodities. They may list their contracts on the London commodity exchange. You can buy their stocks, but this, too, can be difficult for international traders.
If you're searching for the UK's best trading platform that allows you to access commodities trading as CFDs, try us.
There are various trading instruments available:
Spot metals against major currencies e.g., XAUUSD (Gold/US Dollar).
CDFs on commodities e.g., UK Brent oil, US crude oil, and US natural gas.
FTXM is regulated by the Financial Services Commission of Mauritius. We’re also a member of The Financial Commission, an organization that fosters trust and helps traders and consumers resolve disputes.