How to trade commodities as a beginner trader

If you’re a beginner trader, commodity trading might seem daunting. Collecting information on the subject before you start is crucial. 

Follow this article and learn what moves the price of commodities, various types of commodities, and how to trade commodities. 
 

Basic concepts of how to trade commodities

Alt Image text: A smartphone displays commodity prices, surrounded by gold bars, coffee beans, corn, silver, and oil containers

Commodity trading is when you exchange different assets tied to the price of an underlying physical commodity. Usually, commodity traders use futures contracts to speculate on the anticipated value of a commodity.

Evolution of commodity trading

Historically, commodity trading occurred in physical markets where goods were exchanged. The bargaining process took a lot of time and effort.

Later on, brokers became popular. Traders could negotiate prices with these brokers and complete transactions efficiently.

Today, we now have digital trading conducted on commodity trading platforms or any financial markets online.

It’s now easier and faster to trade commodities, as there is no need for actual trading spots anymore.

Types of commodity markets

You can trade commodities in two ways: traditional spot markets or derivatives markets.

Spot markets are also called physical markets, where buyers and sellers exchange physical commodities for immediate delivery.

In derivatives markets, you can trade an underlying asset with futures, options, swaps, and forward contracts.

Types of commodities

Before you know how to trade commodities, you must know the particular commodities you plan to trade.

In other words, you must know the difference between soft and hard commodities.

• Soft commodities: This type of commodity is usually obtained from natural resources. It can be in the form of agricultural products or livestock. Soft commodities tend to be more unpredictable as their prices are influenced by external factors such as environmental conditions.
• Hard commodities: These are natural resources you can mine or extract. Examples of hard commodities are energy and metal sources. The demand for them can sometimes be higher than that of soft commodities.

What affects the value of commodities?

Broadly speaking, commodity prices are highly affected by supply and demand, which in turn are determined by the following factors:

Geopolitical events

Political instability, conflicts, sanctions, and trade disputes can disrupt supply chains and affect the availability of commodities.

The supply and price of crude oil can be heavily impacted by political tensions in regions where oil is produced. This is particularly evident in areas where such tensions are recurrent and can lead to fluctuations in the global oil market.

Check out this article: What is a commodity profit calculator and how does it work?

Weather and natural disasters

Droughts, floods, hurricanes, and other extreme weather occurrences can damage crops and reduce supply, leading to price spikes.

Technological advancements

Innovations in extraction, production, and transportation technologies can profoundly impact the cost of producing and delivering commodities. For example, advancements in hydraulic fracturing (fracking) technology in the oil and gas industry increased production and significantly influenced global oil prices. 

Advancements in solar panel manufacturing processes have led to a substantial decline in the production costs associated with solar energy. These refined techniques, combined with innovative materials and engineering solutions, have made solar panels more efficient and affordable. As a result, solar energy has started to stand toe-to-toe with conventional energy sources in terms of cost-effectiveness, gradually reshaping the energy landscape and offering a green alternative. 

These examples highlight how technological innovations can shape the commodity market by altering supply and demand dynamics and, consequently, prices.

Government policies and regulations

Government policies and regulations hold a substantial sway over the entire lifecycle of commodities. Trade policies, including tariffs and import/export regulations, dictate how commodities flow across international borders, potentially impacting their availability and pricing. 

Subsidies offered to certain industries or agricultural sectors can stimulate production and, in turn, influence the abundance of specific commodities. These create a more favourable environment for producers, increasing the supply of the supported commodity. Over time, this can lead to a saturation in the market, causing prices to drop, benefiting the end consumers.

Moreover, stringent environmental regulations can affect how commodities are produced and consumed, such as in the case of emissions standards for the energy sector.

Speculation activities

The speculations about future costs, as well as the broader financial market activity and dynamics, can profoundly impact price movements. Traders and investors often decide based on their speculations about where prices might be headed, influencing supply, demand, and market prices.

Seasonal patterns

Seasonal patterns can exert a direct influence on the supply of various commodities. For instance, in the agricultural sector, planting and harvesting seasons can significantly impact the availability of crops like wheat and corn. 

These seasonal variations can lead to fluctuations in commodity prices, making it essential for traders and investors to monitor and consider these patterns when making trading decisions closely.

Commodity substitutes

The availability and adoption of commodity substitutes can substantially influence the demand for specific commodities. In cases where alternative technologies and materials become more accessible or cost-effective, they may considerably reduce the demand for traditional commodities. A prime illustration of this phenomenon is the shift towards renewable energy sources, which diminishes the reliance on fossil fuels like coal and oil.

Why trade in commodities?

Trading in commodities can offer you various benefits and opportunities. Here are some reasons why you should learn more about how to trade in commodities:

• Commodity traders will have a superior means of diversifying portfolios and hedging against inflation due to the autonomous movement of commodity prices compared to other types of assets. 

In times of economic volatility, such as when currency values and bonds experience declines, you can trade gold, as this particular hard commodity is widely regarded as a slightly safer bet.  

• Commodity derivatives give high leverage for individuals and companies trading in financial markets online. It allows you to buy and sell positions by trading a small capital as an initial margin.
• Commodity markets are more predictable regarding price movements than other financial instruments. This is because they are often driven by fundamental factors such as supply, demand, and production costs.

What is the best way to trade commodities?

There are various ways you can trade commodities, especially in this age of technology.

You can try trading futures, stocks, contracts for differences (CFDs), and exchange-traded funds (ETFs). You just need to choose a reliable and regulated trading platform that offers these assets.

Commodities futures

The typical way to trade commodities is through futures contracts. This financial derivative lets you buy or sell a commodity at a preplanned future date and price.

Many online traders use this method to hedge the price movement of underlying commodities. As a result, they retain capital when prices drop suddenly.

Commodity stocks

Suppose you want to be part of the market without directly buying commodities. You can do so by buying and selling the shares of businesses in the mining, extraction, and farming industries.

Commodity CFDs

Another way to trade commodities without directly buying them is that CFDs allow you to trade on the differences between the opening and closing contract prices of a commodity.

Commodity ETFs

An ETF is a financial instrument that holds a type of asset or basket of assets. It can offer diversification and a lower cost compared to other financial instruments.

How to trade commodities CFDs 

1. Select a trading method

If you’re looking for an easy and quick way to make short and long trades in the market, then CFD trading may be a good option for you.

You won’t need to be concerned about borrowing assets or dealing with additional fees like you would with traditional short-selling.

Another perk of trading CFDs is enabling you to engage in more significant amounts using less capital, thanks to trading leverage. However, leverage can also magnify your losses, so be careful.

2. Look for the best trading platform

Finding the best CFD trading platform matters a lot. It keeps your assets safe and helps you to trade with peace of mind.  

A CFD trading platform, markets.com provides simple tools and up-to-date information in a safe and regulated trading environment.

3. Choose your commodity

Now that you know how to trade commodities, it’s time to take your learning to the next level and turn it into actual practice. Choose the commodity you’re interested in and start trading it.

If you’re unsure about trading, don’t stress yourself out. Through the Live Chat function, you can contact a customer support agent at markets.com, 24 hours a day from Monday to Friday. Just click on the chat icon at the bottom right corner of the website.

4. Develop a trading strategy

Come up with your strategy by determining your entry and exit points based on technical indicators and price patterns.

Always stay up to date on the news, and do your research on market trends and factors that move the price of the commodities. Lastly, make sure to regularly review and adjust your strategy as the market changes over time.

Master how to trade commodities using a trusted CFD platform

It's important to know the trading basics of commodities CFDs. You need to know the particular commodity you want to trade well, especially what makes its value change.

But it's not just about the steps on how to trade commodities – you should also know why trading commodities could be suitable for your trading style and risk appetite.

Apart from that, you must choose carefully the trading platform you'll be using. It should give you the help and support you need.  

At markets.com, you’ll get access to various educational resources that will help you become a skilled CFD trader more easily.

In addition, the platform offers a selection of popular commodities frequently traded by experts, giving you plenty of options.

Join our amazing trading community and start to practice trading the CFD commodity of your choice now.

When considering "Commodity CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.