How do you go about trading commodities?

Commodities trading can be a valuable addition to any trading strategy, offering potential returns and risk management capabilities.

If you're interested in getting started with trading commodities, this comprehensive commodity trading 101 guide will walk you through the fundamentals of the commodity trading system and retail commodity CFD trading. 

It will offer practical steps and commodity trading basics to begin your journey in the dynamic commodity trading business. 

Trading commodities

Commodities are basic goods that are interchangeable with other products of the same type, which can be traded in a commodities market. A tradable commodity can be categorized into four main types: energy, metals, agriculture, and livestock.

Energy commodities include crude oil, natural gas, and gasoline. Metals commodities consist of gold, silver, copper, and platinum. 

Agricultural soft commodities include wheat, corn, soybeans, coffee, and sugar. Livestock commodities cover live cattle, lean hogs, and feeder cattle.

Commodity trading explained

Commodities electronic trading involves the buying and selling of these goods in financial markets. So how do you get into commodity trading and what is a commodity trader? 

Most commonly, people trade commodities through commodities futures trading. A future of commodity trading is an agreement to buy or sell a specific quantity of a commodity at a predetermined price and date in the future. 

Futures contracts serve as a way to speculate on price movements and manage risks associated with the underlying commodities.

Traders can take two main positions in commodities trading: long and short. Going long means buying a futures contract with the expectation that the price will rise, enabling the trader to sell it at a higher price later for a potential profit.

Going short, on the other hand, involves selling a futures contract with the anticipation that the price will drop. This allows the trader to buy it back at a lower price, making a potential profit from the price difference between the opening and closing time of a trade.

Understanding commodities CFDs

Now let's find out how commodity trading works so you can pick up trading strategies. One popular method of trading commodities is through Contracts for Difference (CFDs) on types of commodity markets. 

CFDs enable traders to speculate on the price movements of commodities without owning the physical assets.

By trading commodities CFDs, you can profit from both rising and falling prices, as you have the flexibility to take long (buy) or short (sell) positions when the price moves.

For instance, let's consider crude oil, one of the most actively traded commodities. 

With CFDs, you can take advantage of both upward and downward price movements. If you believe the price of oil will rise, you can open a long position, and if your prediction proves correct, you can sell at a higher price and realize a profit.

Conversely, if you anticipate a drop in oil prices, you can open a short position, sell at the current price, and buy back the contract at a lower price to secure a profit.

Related: How to trade commodities | markets.com

10 most traded commodities

1. Crude oil: As the most traded commodity globally, crude oil serves as a vital energy source for various industries. According to recent statistics, approximately 94 million barrels of oil are consumed each day worldwide.
2. Gold: Known for its historical value and as a safe-haven asset, gold attracts investors during times of economic uncertainty. In 2020, the total global gold demand reached 3,759 metric tons.
3. Silver: With its versatile applications in industries like electronics and jewelry, silver plays a crucial role in the global economy. The total silver mine production worldwide amounted to around 25,000 metric tons in 2020.
4. Natural gas: This abundant energy resource is essential for heating and electricity generation. The United States is the world's largest producer of natural gas, accounting for nearly 20% of global production.
5. Copper: Widely used in construction, electrical wiring, and industrial machinery, copper is in high demand. In 2020, global copper production amounted to approximately 20 million metric tons.
6. Corn: As a staple food and a primary ingredient in animal feed and biofuels, corn plays a critical role in the agricultural industry.
7. Wheat: A vital crop, wheat serves as a primary ingredient in various food products like bread, pasta, and pastries. In 2020, global wheat production exceeded 770 million metric tons.
8. Soybeans: Widely used in animal feed, cooking oil, and as a biofuel, soybeans hold significant importance in the agricultural sector. The leading soybean producers include the United States, Brazil, and Argentina.
9. Coffee: With its widespread consumption globally, coffee is a highly traded commodity. In 2020, the total global coffee production amounted to approximately 169 million 60-kilogram bags.
10. Cotton: As a key raw material in the textile industry, cotton is in constant demand. The top cotton-producing countries are China, India, and the United States.

Related: How to trade CFDs on commodities | markets.com

Benefits of trading commodities CFDs

Trading commodity CFDs (Contracts for Difference) offers several benefits to traders who wish to invest in commodities:

Profit potential

You may be wondering: Is commodity trading profitable? Or how do commodities work?

Trading commodity CFDs allows you to speculate on the price movements of various commodities, providing opportunities to earn potential profits. 

Whether the prices are rising or falling, you can take advantage of both long and short positions to potentially generate returns.

Leverage

CFDs offer leverage, allowing you to control a larger position with a smaller amount of capital. 

This amplifies your trading potential and enables you to increase your exposure to commodities without committing to the full value of the underlying asset.

Diverse trading options

Commodity CFDs provide access to a wide range of commodities, including energy resources (such as oil and natural gas), precious metals (like gold and silver), agricultural products (such as corn and wheat), and more. 

This diverse selection allows you to explore different markets and take advantage of various trading opportunities.

Risk management

CFDs allow you to implement risk management strategies to protect your capital. You can set stop-loss orders to automatically close your positions if the market moves against you, limiting potential losses. 

Additionally, you have the flexibility to adjust your position size according to your risk tolerance.

Liquidity

Commodity markets are typically highly liquid, meaning there are ample buyers and sellers, resulting in tight bid-ask spreads. 

This liquidity ensures that you can enter and exit positions smoothly without significant slippage or difficulty.

No physical ownership

With commodity CFDs, you do not need to physically own the underlying asset. This eliminates the complexities and costs associated with storing, insuring, and transporting physical commodities.

Accessibility

Trading commodity CFDs is accessible to a wide range of traders, as it does not require a substantial initial investment. You can start with a smaller capital and gradually increase your position size as your trading skills and confidence grow.

Can be used to hedge against inflation 

When understanding commodity trading, it helps to have a good knowledge of which commodities will do well during various types of inflation. You can then use commodity futures to hedge against inflation. 

For example, precious metals do well when central bank policies are questioned, while energy futures tend to thrive during inflation that is driven by cost-push factors related to energy. 

Learn about commodity CFD trading with markets.com

On markets.com, you can speculate on the global market of raw materials and primary goods when it comes to how to trade commodity futures 

For some commodity training, sign up today to trade CFD commodities across diverse industries, including energy, metals, and agricultural products.

When you trade with markets.com, you’re in control. Enjoy a world-class multi-asset trading platform with low spreads, customizable charts, and competitive margin rates. Visit our FAQs section to learn more.

Risk warning: CFD trading involves risk and may not be suitable for everyone. Ensure you fully understand the risks involved and seek independent advice if necessary. This blog post was written for educational purposes only and should not be considered financial advice.