Commodity Trading Explained: How to Trade Commodities

What is commodity trading?

You may be familiar with trading stocks, but what is commodity trading? Commodity trading provides a way to diversify beyond stocks by buying and selling oil and gas, base metals and precious metals, as well as agricultural products, including agricultural products such as wheat, coffee and sugar.

You may be familiar with trading stocks, but what is commodity trading? Commodity trading provides a way to diversify beyond stocks by buying and selling oil and gas, base metals and precious metals, as well as agricultural products, including agricultural products such as wheat, coffee and sugar.

Some traders hedge against inflation by trading commodities. As the prices of commodities made from raw materials rise, the value of their commodity portfolios may rise.

What is a commodity?

Today, commodity trading forms the foundation of the global trading ecosystem. Energy and metals are essential for the manufacture of goods, and agricultural products supply the international food market. They are among the most widely traded commodities and their price movements directly affect the global market.

Commodity market explanation

Commodities can generally be divided into four categories:

• Agricultural Products includes food crops, such as cocoa, cotton, corn and coffee, livestock, such as pigs and cattle, and cash crops, such as palm oil and timber.

• Energy commodities: Includes natural gas, crude oil and gasoline, coal and uranium, ethanol and electricity.

• Metal commodity covers base metals (copper, iron ore, zinc, aluminium, nickel, steel, etc.) and precious metals (gold, silver, palladium and platinum).

• Environmental Goods: Includes renewable energy certificates, carbon emissions and White certificates.

Detailed Commodity Trading

In the past, commodity trading was dominated by multinational conglomerates buying raw materials for production and large banks and trading companies. But with the advent of online trading, private traders have entered the global commodity market with relatively little capital.

Commodity trading has become a popular means of inflation hedging and portfolio diversification. For many traders and investors, commodity trading is the preferred way to protect capital and reduce overall portfolio risk.

Yet commodities are not immune to sharp price swings. The price may unexpectedly change direction to the detriment of your trade, resulting in a loss.

Commodity Trading History

Commodities are one of the oldest financial instruments. Commodity markets are almost as old as human civilization itself. Historical evidence suggests that Rice may have been traded about 6,000 years ago. There is also evidence that around 4500 BC, the Sumerians used clay tokens as a form of money for the purchase of livestock.

Trade in commodities, such as spices, metals and oil, has been the driving force behind the rise of empires throughout history, with some Empires developing complex systems of trade and means of exchange.

To facilitate trade, commodity exchanges are set up around the world. The major producing and trading countries will have their own exchanges. Although there are still some physical exchanges, most transactions are done electronically.

The world's largest commodity exchanges include the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX) in the United States, the London Metal Exchange in the United Kingdom, japan's Tokyo Commodity Exchange and China's Shanghai Futures Exchange.

Characteristics of Commodity Markets

Commodities traded in international markets tend to have some common characteristics:

• Natural resources needed by most countries or regions

• Limited geographical resources

• Price fluctuation

• Standard quality/specification

Commodity prices are driven by a number of factors that affect supply and demand, including economic activity, seasonality, weather and geopolitical events. A major disruption in supply or new sources of production could lead to a sharp rise or fall in prices.

Major global economic trends and technological advances can change the way markets are traded. For example, China's rise as a manufacturing hub has increased demand for energy and metals and changed trade flows.

What drives commodity prices?

If you want to start trading commodities, you should be familiar with the movements of the commodity market. Supply and demand determine direction prices. If the supply of commodities such as copper increases, prices will fall; If the supply falls, prices will rise.

Let's take a look at some of the factors that influence supply and demand and cause price fluctuations in commodity trading.

Commodity consumption

The use of goods by manufacturers and other consumers is one of the main drivers of price. For example, if buyers want to buy more aluminum, and the supply is stable or low, they will have to pay more. Conversely, if demand falls and more aluminum is available in the market, sellers will lower their prices to attract buyers.

Production changes

Supply fluctuations have a significant impact on commodity markets. If mines have to cut production, crops fail or oil producers decide to reduce production, supply will decrease and prices will rise. On the other hand, if a new mine, plantation or oil field starts production, the supply on the market will increase, and if there is not enough demand to balance, the price will fall.

Currency trend

Most commodity markets are denominated in dollars, so the value of the dollar has an impact on prices. If the dollar appreciates against other currencies, commodities become more expensive for buyers who have to convert their currencies into dollars, which could reduce demand. When the dollar depreciates, commodities become cheaper for overseas buyers, increasing demand.

Geopolitical environment

The production of goods is usually concentrated in certain countries or regions. Political developments affect supply. For example, the trade war between China and the United States in 2018 affected the supply and demand of goods. Western sanctions on Iran have reduced crude oil supplies. Russia's invasion of Ukraine has disrupted food supplies on global markets.

Economic activity

A country's economic growth rate drives its demand for raw materials and other commodities. As the economy grows, the purchasing power of the population increases, so does the demand for products and services.

The rise of China and India as major growth engines has increased their demand for commodities. But when a country enters a recession, economic activity contracts and demand for goods falls.

Transportation and storage

The cost of shipping, rail and truck freight affects commodity prices. In addition, disruptions to transportation, for example due to bad weather or driver strikes, may drive up the price of goods at the intended destination. It can also reduce prices if traders try to sell goods locally.

In the crude oil market, when there is an oversupply, dealers wait for prices to rise and tankers are used as floating storage. This reduces the availability of tankers and increases freight rates.

Weather

Adverse weather conditions can have an impact on a range of commodities. It can disrupt harvests, disrupt oil and gas production and hinder mining activities, as well as create logistical problems. Cold weather increases demand for energy, pushing up prices. Conversely, good weather will bring a bumper harvest, leading to an oversupply of agricultural products.

Seasonal

There are seasonal factors that affect demand and supply. Demand for some commodities is seasonal, with energy demand rising in winter and falling in summer.

Demand for jewelry and metals may increase during the festival and wedding season in some countries. The supply of agricultural products will depend on the harvest time of the crops.

How to Trade Commodities

Are you interested in how to trade commodities? Commodities are most commonly traded on futures exchanges, allowing traders to speculate on future prices.

Buyers of goods, such as manufacturing companies, also make physical purchases to pick up goods. As a trader, you can use commodities in a number of different ways, depending on your experience and preferred method.

CFDs Trading

A popular way of trading in the commodity market is the use of contracts for difference (CFD). A contract for difference is a contract between a trader and a broker that allows the former to speculate on the spread between opening and closing positions.

When trading commodity CFDs, you do not own the underlying asset, but only speculate on its price fluctuations. Therefore, trading CFDs does not involve the payment of additional storage costs, which are required for the delivery of physical commodities. Trading commodities through CFDs allows you to go long or short directly without having to deal with traditional commodity exchanges such as CME, ICE or NYMEX.

There is an important difference between buying a commodity and trading a commodity CFDs. CFDs are usually not used as long-term investments due to the overnight costs required to maintain a position.

Please note that CFD trading is risky. CFDs are leveraged products, which means that your potential profits can be magnified, but if the market is against you, your losses will also be magnified.

Commodity futures

If you have an account with a broker that offers futures trading, you can buy and sell contracts from a futures exchange. By trading commodity futures, you will enter into an agreement with another investor based on the price at which you expect the commodity to trade on a specified date.

Commodity Options

Commodity options are derivatives based on underlying asset futures contracts. An option contract gives the holder the right to buy and sell the underlying commodity at a specified price (called the exercise price) at a set date in the future. If the price moves towards the strike price before the maturity date, you will make a profit; If the price moves against the position, you will lose the money paid for the contract.

Purchase of physical goods

Using derivatives to speculate on prices may be the preferred way for retail investors to trade commodities because you don't want to make physical delivery. However, if you do want to own physical commodity assets, such as gold bars or oil drums, you can buy them from a dealer and keep them safe.

Commodity stocks

What Is a Commodity Stock? Another way to speculate directly on commodity prices is to trade shares of companies related to the industry.

For example, you can invest in the stock of a refiner or copper miner because the share price may react to changes in the price of the underlying commodity. This can also reduce your risk exposure, because a well-run company may still generate profits even if commodity prices fall.

You must remember that the company's stock is not directly related to the price of the commodity, and the stock price may also run counter to the price of the commodity, causing losses, because the stock is affected by other factors such as the company's management strategy and fundamentals.

Commodity ETF

For traders looking for broader market exposure, there are exchange-traded funds (ETFs) and exchange-traded notes (ETNs) pooling funds from investors to build portfolios that track the prices of a single commodity or basket of commodities.

ETFs can buy futures contracts or invest in stocks of commodity companies. They offer investment or trading opportunities across a diverse range of assets. However, ETF will have a management fee and, depending on its composition, may not provide the same return as the assets it should track.

Commodity Pooling and Futures Management

There are private funds that invest in commodities, but unlike mutual funds, they are not publicly traded, so you must get approval to buy them. Commodity funds and managed futures funds can use more complex trading strategies and offer higher return potential than ETFs and other funds, although management fees are usually higher as a result.

What is a commodity trading strategy?

Before you begin, it is important to determine the commodity trading strategy you will use to open, manage and close positions, and to minimize the risk of loss.

Depending on your experience, risk tolerance and preferred approach, you can employ several different commodity trading strategies. Most commodity strategies use technical analysis and market fundamentals to decide when to buy and sell.

Technical Analysis

Technical analysis uses a series of chart indicators to track price movements, identify price graphs and give buy and sell signals. Technical indicators form the basis of most trading strategies because they allow traders to decide which buying and selling patterns to use in different ways. Each strategy has its own combination of technical indicators.

Price behavior trading

The strategy to focus on price action is to track the historical price movements of a commodity in order to predict how it will trade in the future. Commodity markets tend to be highly liquid, giving traders the opportunity to react quickly to price fluctuations.

Price action trading is great for quick decision-making because traders do not need to wait for technical indicator signals that may lag the price movement.

Trend Trading

Trend trading, also known as position Trading, uses a long-term trading method that may hold positions for several months. Trend traders try to speculate on the trend direction of commodity prices. They enter long positions when prices are in an uptrend and then short positions when prices are in a downtrend.

Trending traders tend to focus more on fundamentals than technical indicators, as trends can take time to emerge. Trend traders are always looking for trend reversal to decide when to close a position.

News Transactions

News trading strategies focus on news events that may have an impact on commodity prices. These can include everything from extreme weather to geopolitical developments.

News trading strategies buy commodities such as oil, metals or grains at the start of Russia's invasion of Ukraine and sell when prices rise on fears of supply repercussions. News trading strategies can also buy and sell goods based on news of storms or other adverse weather conditions affecting crop or mining yields.

Position Trading Strategy

Also known as trend trading, position trading focuses on long-term price trends rather than short-term fluctuations.

Interval Trading

Range trading strategies determine the level of support and resistance for price determination, usually using technical analysis indicators such as Bollinger Bands> or other charting tools. Range traders buy when the price is close to the support level at the bottom of the range and sell when the price is close to the resistance level at the top of the range.

In commodity markets, support and resistance levels are strongly influenced by supply and demand, as strong demand or tight supply pushes prices to peaks until buyers cannot afford to pay higher, prices will come back down. It is important for traders to determine when the commodity reaches the oversold zone, as this indicates that the commodity is undervalued and the price will rebound.

Breakthrough Trading

Breakout trading strategies focus on short-term price movements. Traders hope to profit from commodities that have broken out of recent trading ranges, buying before prices move higher or selling before prices fall.

A breakout trading strategy can be used with range trading when the price is below support or above resistance. When the price breaks out of the range, the breakout trader can enter the operation.

Fundamental Trading

Fundamental trading focuses on analyzing market fundamentals that affect supply and demand, not just technical indicators that predict price movements.

For example, commodity traders who have observed a prolonged drought in Latin America may buy agricultural products because lower harvests are expected to reduce supply. Or China's strong economic growth could lead traders to trade industrial metals in anticipation of strong demand. Conversely, a crude oil fundamental trading strategy may prompt traders to short crude oil in response to signs of a recession reducing demand.

The advantages and disadvantages of trading commodity CFDs.

CFDs allow you to speculate on the price of commodities without having to make physical deliveries or worry about the storage costs of assets such as gold or silver bars. Unlike futures contracts, CFDs do not have a specified expiration date, giving you the flexibility to choose when to close your position. Please note that due to overnight fees, CFDs are considered short-term investments.

CFDs also offer the option of two-way trading of commodities. Whether you have a positive or negative view of the commodity price forecast, you can speculate on whether the future price trend is up or down.

In addition, commodity trading through CFDs is usually commission-free, with brokers profiting from spreads and traders trying to profit from overall price changes.

Another feature of CFD is that it is a leveraged product. Leverage makes it highly risky because it can magnify losses and profits. For example, the 10% margin provided by Phronimos Group (the amount may vary by commodity and CFD broker) means that you only need to deposit 10% of the total value of the trade you want to open. The rest is borne by your CFD provider.

In this case, if you want to trade a specific commodity CFD worth $1,000, and your broker requires a 10% margin, you can start trading for only $100.

However, you should also be aware that CFDs are risky because CFDs are leveraged products that use margin. This means that they will not only increase gains when the price moves the same as your position, but also increase losses when the price moves opposite to your position. Before you start trading CFDs, it is important to do your own research to understand how leverage and margin work.

Why trade commodities with Phronimos Group

With advanced artificial intelligence technology as the core: personalized news feeds provide users with unique content based on their preferences. Neural networks analyze in-app behavior and recommend videos and articles that fit your investment strategy. This will help you improve your approach when trading commodity CFDs.

Margin Trading: even if your account has limited funds, Phronimos Group allows you to trade commodity CFDs and other assets with huge trading volume. Keep in mind that CFDs are leveraged products, which means that both profits and losses can be magnified.

Spread Trading: by trading commodity CFDs, you do not buy the underlying asset itself. You speculate only on the ups and downs of a particular commodity. CFD traders can go short or long, set stops, guarantee stops and limit orders and apply trading scenarios consistent with their objectives. CFD trading is similar to traditional trading in terms of related strategies. However, due to overnight fees, CFD trading is inherently short-term. In addition, leverage has additional risks because it can amplify profits and losses.

All-round transaction analysis: browser-based trading platforms allow traders to form their own market analysis and make predictions with smooth technical indicators. Phronimos Group provides real-time market updates and various chart formats, which can be used on desktop, iOS and Android.

Sign up at Phronimos Group and use our web platform or download the trading app to trade CFDs anytime, anywhere. Open an account and view the world's most traded markets in just three minutes.

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Commodity trading time

If you want to start trading commodities, you should know the standard commodity market time so that you know when you can open and close positions.

On most exchanges, commodities are traded between 09:00 and 23:30 local time on weekdays. The exchange is closed on weekends and public holidays. Exchanges usually publish a calendar every year, listing the days when the market is closed due to holidays or any other reason, so that traders are aware of any changes in the trading hours of commodities in advance.

In Phronimos Group, traders can trade commodity CFDs at the following times:

• Monday to Wednesday: 00:00 - 21:00;22:05 - 00:00

• Thursday: 00:00 - 21:00

You can check the trading hours of a particular item at any time on the dedicated market page of our website or platform.

When is the best time to trade commodities?

There is no optimal time for trading commodities. The preferred trading hours of the day vary depending on the commodity and exchange and the situation of the trader. The following are examples of times when commodity trading is relatively active and the volume of transactions is also high.

West Texas Intermediate (WTI) crude contracts, the benchmark for the U.S. oil market, tend to be most liquid between 09:00 and 14:30 EDT. Agricultural prices tend to move with the release of the World Agricultural Supply and Demand Estimates (WASDE) report, which contains data on supply and demand expectations. The gold market tends to be most active when the market opens at 08:00 GMT London time and the US market at 13:30 GMT, as traders tend to place their orders at the opening.

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