Looking for a way to invest in the world’s most valuable raw materials? Commodities trading gives you the opportunity to buy and sell natural resources like gold and oil, as well as agricultural goods like wheat, coffee and corn which power the global economy.

Our guide to commodities trading for beginners covers the basics, including the two categories of commodities and some basic trading scenarios to consider. Our commodities trading guide will also help you to learn commodity trading strategies which you can deploy using your preferred broker.

Commodities Trading Basics

The premise of commodities trading is the buying and selling of raw materials produced or grown worldwide. It’s considered one of the oldest forms of financial trading. Before the days of the internet and online trading, individuals would exchange commodities for value. Whether it was wheat, coffee beans or oil, these commodities would be traded for fiat currency to enable producers and local communities to thrive.

When it comes to trading commodities online today, your goal is to generate a profit from the fluctuation in the price of an asset. For instance, if you buy the asset, you’d need its value to rise further to close your position for a profit. If you sell the asset, expecting it to fall in value, you’d need it to be worth less than the price you sold it to close out for a profit.

The price of commodities are determined by the good, old-fashioned market forces of supply and demand. When economies are strong, demand could outstrip supply, forcing prices upwards. This scenario can also occur when supply is weak, causing those in need to pay more for their materials.

When economies are on the brink of recession, demand may start to diminish. When supply starts to outstrip demand, the market price of materials begins to fall. Similarly, if supply is stronger than expected, this could also affect the market price since the scarcity of the asset is diminished.

Most commodities will fall into two categories:

• Hard Commodities

Hard commodities are raw materials which are extracted or mined from the Earth’s ground. These include oil, gold, natural gas and aluminium. 

• Soft Commodities

Soft commodities are typically livestock or raw materials which are produced for consumption, including sugar, soybeans, corn and wheat.

Commodities trading for beginners is exciting because it’s tangible. You’re trading real-world stuff that impacts the world around us. Whether you’re a novice or a seasoned trader, it’s important to understand the basics of commodities trading to negotiate this dynamic market with confidence.

Commodities can be traded online via your broker’s supported trading platforms via futures contracts, spot trading and ETFs. You can speculate on the price of a commodity by buying or selling contracts tied to it, like oil, wheat or gold.

The commodities market isn’t a 24/7 exchange, but it operates almost 24 hours during weekdays owing to the overlap from the global stock markets. The bulk of hard commodities and several soft commodities are traded on exchanges like the CME Group and NYMEX.

Commodities Trading Examples

What commodities are traded and when? Below, we’re going to explore a handful of commodities trading examples for hard and soft commodities, demonstrating the types of scenarios to look for as potential trading angles.

Hard Commodities

Gold and Silver

• Precious metals like gold and silver are some of the most popular stores of value, especially in the face of inflation. In the scenario of rising global inflation, with central banks alluding to interest rate hikes, traders may flock to buying gold. This increased demand will push the market value of gold higher
• As a commodities trader, you may look to buy gold futures at $1,900 per ounce. When gold hits $2,000 per ounce, you then decide to sell the futures, locking in a profit between your entry and exit prices.
• There’s also scenarios when the strength of the U.S. dollar can push investors away from gold and into the greenback. If USD is strong, gold prices may decline, creating short-selling opportunities. 

Crude Oil

• Geopolitics are one of the biggest drivers of the crude oil market. Let’s imagine one of the world’s biggest producers of oil incurs sanctions. This could shrink the global supply of oil, thereby pushing the price of oil barrels higher. Savvy traders would look to catch wind of potential sanctions and buy Brent Crude futures in anticipation of such a supply shock.
• At the other end of the spectrum, traders may look for signs that major economies are slowing down or even entering recession. Sluggish industrial activity is bad news for oil consumption, which can lower oil demand and prices per barrel. In this scenario, a trader would short-sell WTI crude oil futures and take a profit from falling prices down the line.

Soft Commodities

Coffee

• Brazil is one of the world’s biggest producers of coffee beans. News reports from the country suggest labour strikes are possible regarding pay conditions. Strike action could harm supply chains and curb coffee exports, thereby limiting supply. A savvy commodities trader may take a long (buy) position on coffee futures, anticipating the price of coffee to rise.
• Similarly, if Brazil experiences optimal weather conditions, this could result in a bumper harvest, resulting in global supply far exceeding actual demand. In turn, this could result in coffee prices plunging, with savvy traders shorting coffee futures to capitalise on the decline. 

Wheat

• Wheat is another agricultural commodity which can experience volatility in the market. Weather also plays an integral role in the production of wheat. Areas facing extended droughts will often see wheat yields dip. Wheat traders will keep tabs on crop reports and buy or sell wheat futures if they believe crops will be weaker or stronger than expected.
• Bumper harvests in exporting nations like Australia could saturate the market, leading to falling wheat prices and a chance for short-sellers to profit.

Commodities Trading Strategies

Hopefully, the above scenarios have whetted your appetite for commodities trading and given you an idea of the plethora of trading angles available across hard and soft commodities. Below, we’ll discuss some additional strategies for commodities trading for beginners to consider:

Trend Following

As with other asset classes, commodities trading opportunities occur just by following market trends. Imagine crude oil prices were gently rising following increased global demand and economic growth. You could open a long futures position and hold it until signs of a price reversal or weakening demand appear.

Range Trading

Some commodities will trade within specific price ranges, especially during bouts of low volatility. Commodities traders will look to buy a commodity at the bottom end of its price range, known as the support level. They will then look to sell the commodity at the top end of its price range, known as the resistance level.

Seasonal Patterns

The price of many commodities enter seasonal patterns throughout the year. For instance, soft commodities like corn and wheat may experience more volatility depending on the weather conditions during planting and harvesting. The key is to master these seasonal cycles and plan your trading positions accordingly.

Diversification

Traders will also look to diversify their portfolio by investing in multiple commodity types e.g. metals, agriculture and energy to mitigate risk.

How to Trade Commodities with ActivTrades

If you’re ready to start commodities trading online, ActivTrades is a great place to start your journey trading hard and soft commodities using futures contracts. As one of the top commodities trading firms, we offer commodities CFDs with tight spreads and lightning-fast execution, with the ability to process over 100,000 commodities trades per second for our clients.

Try our free demo account

Experience real commodities market conditions risk-free by opening a demo account with ActivTrades. There’s unlimited usage, allowing you to trade and test strategies with zero limitations.

Open an individual account whenever you’re ready

Our real-money individual trading accounts offer negative balance protection, support multiple currencies and execute trades at the best possible prices, with no requotes or rejections.

Pick your preferred commodities trading platform

Choose from four different trading platforms supported by ActivTrades to open and manage your commodities positions. Our proprietary ActivTrader platform is an intuitive commodities trading platform, available on desktop and mobile. You can also trade commodities with well-established platforms like Trading View, MetaTrader 4 and MetaTrader 5.

Use our trading tools to conduct fundamental analysis

Keep abreast of the seasonal cycles when trading commodities by utilising our trading tools such as our economic calendar, which allows you to monitor highly-important news and data updates.

There’s also our regularly updated market analysis hub, where we discuss the market picture for influential commodities like gold, oil and many more.

FAQs

Are commodities a good investment?

It can be beneficial to invest in commodities to diversify your wider trading portfolio. Commodities have minimal to no correlation with equities or government bonds, reducing your portfolio’s overall risk. Commodities are also tangible assets with real-world value. This means in periods of high or volatile inflation, commodities can be useful to buy as their price goes up, preserving your buying power.

Are commodities high risk markets?

Most traders consider commodities to be a high-risk play. That’s because the market price of commodities can be volatile, due to the various market, geopolitical and regulatory factors to add into the mix. Weather conditions can also wreak havoc with some agricultural commodities, with extreme weather leading to poor harvests and diminished supply.

Are commodities securities?

No, commodities are not the same as securities. Securities are financial instruments which denote a stake or credit in a stock, option or bond. Commodities are physical assets which can be exchanged or traded. They are also subject to less stringent regulations than securities.

What commodities should I invest in?

Ultimately, only you can decide which commodities best suit your trading style and portfolio. Both hard and soft commodities are influential to the global economy, but you’ll need to do your own research to decide which ones are in greatest demand and the necessary time horizon for holding and profiting from them.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

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