Introduction
Commodities are essential raw materials used in everyday life. These include energy resources, agricultural goods, and metals. Commodities can offer different trading opportunities, directly through spot markets or indirectly through CFDs like futures.
In this lesson, you will learn what commodities are, what moves their prices, and how to start trading commodity CFDs step-by-step.
What are Commodities?
Commodities are physical goods traded on global markets. They fall into three main categories:
- Agriculture: wheat, corn, coffee, sugar
- Metals: Gold, Silver, Platinum
- Energy: oil, natural gas
Spot vs Futures Commodities
Spot commodities: Real-time trades based on the current spot price. When you trade spot, you are speculating on the commodity’s potential value. There is no fixed expiry, and the price reflects current supply and demand dynamics.
Futures commodities: Agreements to buy or sell a commodity at a fixed price on a predetermined future date. These contracts are standardised and traded on future price movements. Be aware of margin, rollover, and how futures expiration works.
When trading commodities through CFDs, you do not buy the physical asset. Instead, you trade on price movements, allowing you to profit from rising or falling markets.
With CFDs, you can access both spot and futures commodity markets:
- Buy (go long) if you think the price will rise
- Sell (go short) if you expect the price will fall
This makes Commodity CFDs accessible for beginners who want to trade without large capital as well as any trader who looks to diversify their portfolio.
How to trade Commodities
1. Choose a Commodity: You can find them as a main Market category in the trading platform of your choice. You might often find Precious Metals and Energies as a distinct asset class. Each Commodity has its own unique characteristics and influences on its price.
2. Choose a direction: Upward or downward trend, you should use the strategy that reflects your goals.
3. Set your trade size in lots or in the amount of units of the instrument: Similar to other instruments, Commodities can be traded in smaller volumes through CFDs.
4. Calculate the required margin: Margin is the amount of money the broker sets aside from your account when you open a trade.
5. Calculate the profit:
Use the formula: (closing price – opening price) x lot x contract size if you are going to buy
Use the formula: (opening price – closing price) x lot x contract size if you are going to sell
6. Set stop loss and take-profit: Use stop-loss to protect yourself from unexpected price changes, and take-profit to lock in profits at your desired price levels.
7. Open a trade: Once you have made all the necessary calculations and set your risk parameters, open a trade based on your market outlook.
8. Monitor your margin level: This will allow you to check on your account’s viability through a measurable percentage. The higher the percentage, the more room you have
9. Adjust or close the trade if you believe it is necessary.
What influences Commodity prices?
Commodity prices tend to be more sensitive to global events compared to other assets. Understanding the following key drivers can help you anticipate potential volatility:
Supply and demand
Real-time demand and supply measures create spot commodity prices, while futures reflect what traders think will happen. If demand for oil increases while supply remains limited, prices typically rise, and oversupply can push prices down.
Geopolitical events
Conflicts, sanctions, and trade restrictions can disrupt supply chains, and instantly impact spot prices. Long-term supply concerns, storage bottlenecks, or production forecasts can push futures prices.
Weather and seasonal patterns
Poor weather can reduce agricultural production, affecting prices for crops like wheat or coffee.
Economic conditions
Inflation, interest rates, and industrial demand (especially for metals like gold or copper).
Market sentiment
Investors often turn to gold during uncertainty, which can push prices up.
Risk management tips
- Use stop-loss and take-profit orders: For both spot and futures trading, but especially the latter, where price swings over time can be large.
- Monitor margin closely: Futures often require more margin and carry a risk of margin calls.
- Avoid over-leveraging: Especially on futures, as it tends to amplify their risk.
- Be cautious when entering contracts near expiry: Futures behaviour changes as expiration approaches
Key features of Commodity trading
Commodity markets behave differently from Forex or Stock markets. Here are a few things to keep in mind:
Diversification
Commodities can help balance risk in your portfolio. For example, Gold often rises when stock markets decline.
Volatility
Commodity prices can move sharply due to weather changes, geopolitical tensions, or supply disruptions.
Forecasting challenges
External factors can be unpredictable, making it harder to forecast long-term price movements.
Global dependency
Worldwide events such as trade conflicts, sanctions, or natural disasters, can significantly influence commodity markets.
Conclusion
Commodity trading through CFDs can give you an accessible way to explore global markets without owning physical goods. By understanding the key differences between spot and future commodity trading, what influences commodity prices, using risk management tools, and starting with simpler, more liquid assets, you can start trading with more confidence.
The next lessons will deepen your asset class knowledge, to help you create a more diversified approach to trading.
