What is Commodity Trading?

Commodity trading is the act of speculating the prices of goods or raw materials like oil and gold (through futures, options contracts, or Contracts for Difference). Traders bet on an asset price movement without taking physical delivery of the product.

Let’s look at the different variations/categories of commodities:

Precious Metals

Gold, along with silver, palladium, and platinum are considered precious metals.

Gold is commonly seen as a safe haven asset. It tends to be more stable and reliable in times of economic crises and high inflation.

This characteristic can present a lot of short-term trading opportunities.

But its value can still shift due to deflation/high inflation, interest rates, central bank policies and the strength of the US dollar.

Silver: XAG can also act as a capital perseveration asset, but unlike XAU, silver has more industrial use (for electronics and jewelry). This dual role makes it more volatile than gold.

Platinum (XPT) & palladium (XPD): Used mainly in the automobile industry for catalytic converters. The health of this industry strongly influences their prices.

Energy

US crude oil: Known for its high volatility, WTI is one of the most traded natural resources in the energy sector. It reacts easily to geopolitical events, OPEC decisions, inventory reports, and fluctuation in global demand.

To get a rewarding experience here, you must be good at interpreting news flow and technical levels.

Natural gas: NAT GAS price is highly sensitive to weather forecasts (especially in North America where it is mainly used for heating and power generation.). It’s worth can also be affected by storage levels and LNG export dynamics.

Closely monitor your economic calendar to learn about latest events that can affect these instruments, and position accordingly.

Agricultural products

Farm produce like corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar can also be traded as derivatives.

Speculators can also trade these instruments to profit from price changes too. And their volatility can be influenced by issues such as demand, climate change/extreme weather events, farm-focused reports, etc.

Commodity trading strategies

Moving averages: This indicator filters noise (smooths out short term price fluctuations) and calculates the average price of a commodity over a timeframe.

It reveals the core direction of the market. It can be used to identify possible trends, and to spot good entry & exit points based on price move relative to the average.

Range-bound trading: Range trading simply means speculating within the boundaries (the horizontal channel) of a sideways/consolidating market. Here, the goal is to buy a commodity near the support level (the lower boundary) and sell around resistance (the upper boundary).

Fundamental strategy: This is trading based on news events that can impact a particular commodity. Here, you want to have a strong knowledge of your chosen commodity instrument and its global ecosystem.

It is not just about reacting to headlines, but anticipating how these reports will ripple through supply chains and influence demand.

Breakout system: After a period of consolidation, a strong buying or selling pressure can push price beyond its established boundaries (support or resistance level). A breakout trader targets these moments early in order to take advantage of the emerging momentum/trend.

Specialisation: Choose a single commodity and dedicate your analytical effort to it. Doing this would allow you to comprehend every aspect of its market. It would make you productive when trading.

You become more focused, less distracted and better at spotting opportunities. This approach helps you develop expertise & improves reaction time.

The market players

Speculators: Individual & institutional traders fall into this group. Their goal is to profit from quick price moves.

Producers: Big farmers, or miners/oil companies may trade the market in favour of themselves by large buying or selling. The goal is to guarantee profit and get the best/fair price for their goods.

Consumers: These are the end users of products made or sold by producers. For example, several vehicles/engines are powered by oil and if everyone switches to electric, its demand will seriously go down. And its price too.

FAQs

Can I make money trading commodities?
Yes. But it comes with risk too. Rewards depend on how well you know the market, your risk management plan, and technique.

How do you start commodity trading?
After you’ve acquired the needed skill and knowledge, choose a trusted prop firm that offers commodities and open a trading account.

Is gold a commodity or currency?
Raw gold is a commodity. XAUUSD is a currency pair in forex.

How much money do I need to start trading commodities?
You don’t need much. With as little as $25, you can start trading commodities from the comfort of your home.