Commodities Trading | Online Guide & Best Brokers

Commodities trading requires skill but has the opportunity to be profitable when mastered. The variety of financial products and instruments that can be used to trade commodities means it is a versatile market, suitable for a range of traders. This guide for beginners will explain what commodity trading involves and provide investing tips and example strategies. We’ve also listed the best brokers for trading commodities below.

Top Commodities Trading Brokers

Forex.com boast a global reputation. Regulated in the UK, EU, US and Canada they offer a huge range of markets, not just forex, and offer very tight spreads and a cutting edge platform.
EagleFX is a popular trading broker offering forex, stocks, cryptos & commodities.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Pocket Option is a global binary options broker with sleek proprietary trading platform and competitive range of assets.
Quotex offers a proprietary web platform that offers digital options and copy trading.
Rockfort Markets is a New Zealand broker with a competitive range of assets, trading platforms and market conditions.
LQDFX offers online trading with multiple STP accounts and MT4 analysis tools.
IB Boast a huge market share of global trading. With a minimum deposit of $10,000 however, they remain an option for larger traders only.
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Types Of Commodities

When looking at the history of commodities trading, the practice dates back to ancient times and well before the trading of stocks and bonds. A definition of a commodity, whether talking about crude oil, gold or lumber (3 types of commodities), is a raw material or agricultural product that can be bought and sold on the market.

There are four main categories of commodities for trading: metals, energies, livestock & meat and agricultural. The former two tend to top the list of the most actively traded commodities online.

Metal commodities include a mixture of precious metals, such as gold and silver, and industrial metals, which include iron ore and tin. Energy commodities for trading include crude oil, gasoline, heating oil and natural gas. The livestock and meat category includes pork bellies and live cattle, whilst agricultural commodities include corn and soybeans.

Commodities can also be differentiated by whether they are ‘hard’ or ‘soft’. Hard commodities are those that must be mined or extracted, so commodities like gold and oil. Soft commodities include agricultural and livestock commodities.

Commodities trading guide

Next, we look in more detail at a few of the most popular commodities on the market.

Crude Oil

When it comes to commodities trading, crude oil is the most popular in the world, with a large volume (millions of barrels) traded each day. The two main crude oil benchmarks are US West Texas Intermediate (WTI) Crude and Brent Crude, although there are many other types. The price of each barrel of oil will depend on how closely aligned that crude oil is to a particular benchmark.

WTI Crude is the main benchmark for the US oil market, whereas Brent Crude originates from the North Sea oilfields. Brent futures are available to trade on the ICE Futures Europe, which provides trading for various commodities and derivatives.

Natural Gas

Natural gas is an energy source used to heat buildings and cook food, amongst other things. Traded on the Chicago Mercantile Exchange (CME) Group, Henry Hub Natural Gas futures are the benchmark in this area. The price of natural gas is affected by supply and demand factors, many of which are similar to those that impact the price of crude oil. These include global demand driven by economic output, as well as the rise of alternative forms of fuel (for example, in the renewable industry).

Soybeans

The US dominates the soybean market, with the commodity available to trade primarily on the Chicago Mercantile Exchange (CME). The price of soybeans is usually correlated to corn and wheat, while the supply and demand factors that influence its price are common to many agricultural products. These include the weather and the growth of markets around the world.

Gold

Gold offers lots of opportunities for traders. It can be traded using a variety of financial instruments, including futures, options and ETFs, with many speculating on it to profit from its price movements. Some precious metals, including gold, have traditionally been associated with a degree of stability, so it is often used to hedge against instability and inflation when trading commodities.

How Does Commodities Trading Work?

Commodities are commonly traded on exchanges through financial instruments and shares in relevant companies. This is done in markets across the globe, including in the US (e.g. New York City (NYC), San Francisco and Chicago), the UAE, Malaysia, Pakistan, India (e.g. on the NSE or on the MCX), Canada, Australia, Hong Kong, the UK, Kenya, Nigeria, South Africa, Singapore, New Zealand (NZ), the Philippines and Netherlands.

In Switzerland, commodities trading is mainly focused in Geneva, Zug and Lugano. The Zug Commodity Association (a branch of VTB Commodities Trading DAC), helps regulate the supply chain of commodities.

In the US, commodities trading activity is monitored via an assigned NAICS code.

Commodities Industry

The Impact Of Trading Commodities On Jobs, Income And The Economy

The impact of trading commodities depends on how it is carried out. Those interested in the commodities industry can train as a professional trader, which allows them to speculate using other people’s money. Alternatively, retail trading provides investors with the opportunity to use their own money through a broker, using a dedicated retail account.

The professional trading of commodities supports many jobs, whether they are entry level jobs (i.e. a graduate programme), an internship scheme or an experienced commodities trading advisor or analyst. These opportunities are available at investment firms and banks, such as J.P. Morgan, which has a large presence in the UK in London.

In the US, you can take a look at the recruitment website Zippia to see a job description and how to answer general interview questions. Many of these jobs, whether for JP Morgan, Morgan Stanley or Goldman Sachs, will attract a high wage or salary. A degree or other high-level qualification may be needed for some investment banking and commodity trading firms.

However, if you are not looking to make a career out of commodities trading just yet, retail trading has the potential to generate returns with much lower barriers to entry.

Future Of The Commodities Industry

As the global economy recovers from Covid-19, which had a significant impact in 2020, many investors are putting their money into commodities. Indeed, hedge funds linked to commodities achieved strong returns in 2021.

Other businesses in the industry include DXT Commodities, which acts as a trading house, YMAX Commodities Trading LLC (a company with a prime location in Dubai), Commodities Trading s.r.o. (involved in commodity trading operations in the wholesale markets), HDFC Securities, Commodities Trading (Pvt.) Ltd, Macquarie Commodities Trading US LLC and Atlantis Commodities Trading (UK) Ltd. However, the oil trader company, ZenRock Commodities Trading Pte Ltd, was one of several firms to come into contact with financial difficulties.

In the agri-commodity market, blockchain technology is being implemented to improve efficiency. The use of this technology in other areas of the commodities market could have a transformational impact on business in the industry. Some commodities, like lithium, cannot be speculated upon directly, though water has recently been added as a tradeable commodity.

How To Invest In Commodities

Understanding how you invest in commodities is key to deciding whether it, rather than stock or currency trading, is right for you. The good news for speculators is that your options are not severely limited when it comes to these assets but understanding how they work can be difficult.

So, what is the meaning of ‘investing in a commodity’ and how can we trade it? Let us take a look at some of the products and financial instruments in the commodities trading market (e.g CFDs vs futures), which you can use to gain exposure.

Beginners guide to trading commodities

Futures Contracts

Futures are a common way to participate in commodities trading. Essentially, the contracts are an agreement to buy or sell a particular asset at a pre-determined price on a particular date. They have helped provide price certainty to many commodities businesses and financial institutions, as well as being used as a hedging strategy and a mechanism to speculate on the price movement of a particular commodity.

Futures contracts can either be settled by taking delivery of the commodity (e.g., 100 barrels of oil) or through a cash settlement, where the difference between the price agreed in the contract and the price at the end of the contract is paid. Aas a day trader or speculator, this is how you would settle the contract.

Consider that a futures contract has a price of $70 per barrel of oil in one month’s time. The current market price is $65 and you purchase the futures contract because you think the price will rise beyond $70. If it does, you can make a profit (minus any broker fees). If it does not, you incur a loss.

Options Contracts

With an options contract, traders have the right (but, crucially, not the obligation) to purchase the asset/settle up at the end of the contract. Therefore, using the example above, if a trader thought the price of a barrel of oil was going to rise above $70 but it did not, their loss would be limited to the price of the options contract, rather than the difference in price between that stated in the contract and the price at the end of the contract.

ETFs

ETFs (or exchange-traded funds) are on the rise when it comes to commodities trading. Their popularity is partly a result of them being easy to buy and sell freely (in a way that mutual funds are not), plus they help to easily diversify portfolios and spread risk.

An ETF will usually track the price of a collection of assets (for example, a group of commodities or a collection of oil trading companies). Traders can purchase shares in the fund to gain exposure to the price movement of the underlying assets. The trader does not own the assets – rather the financial institution that creates the ETF does.

Be aware that you will likely pay management fees, in addition to standard brokerage fees, for trading an ETF. However, this cost needs to be balanced against the benefit of portfolio diversification and a professionally-led investment strategy.

There are also ETNs (exchange-traded notes), which are similar to a bond (without interest) in that, upon maturity, an amount by which the asset price has changed will be exchanged.

Mutual Funds

Mutual funds share common features with ETFs in that a mutual fund is a collection of assets and traders can purchase shares of the fund. However, buying and selling shares in a mutual fund is not very easy, they can only be traded at one point each trading day, whereas ETFs can be bought and sold freely throughout the day.

CFDs

Contracts For Difference (CFDs) are a popular financial instrument and one that many brokers have decided to focus on. Used regularly in commodities trading, they give traders the opportunity to speculate on the price movement of an asset (either upwards or downwards) without actually owning the underlying asset.

They are also a leveraged financial instrument, which means that investors can put up only a portion of the cost of a position, with the rest filled by the broker. For example, if the margin requirement for an asset is 10%, this means that a £10 investment would provide an exposure of £100. This, therefore, can increase both profits and losses.

Spread Betting

Spread betting is similar to CFD trading as traders are still speculating on the price movement of the asset without actually owning the underlying asset. The main difference between CFD trading and spread betting is tax. When trading commodities in the UK, spread betting is not subject to capital gains tax, whereas CFD trading is (although neither are subject to stamp duty). It is also worth pointing out that, in 2020, the European Court of Justice ruled against the UK for extending a zero-rate VAT scheme to certain commodity traders.

Spot Market

One of the main reasons why a speculator would engage in the spot market, which essentially means trading at the current market price for immediate delivery, is to close a position in the futures market. For example, if the value of gold has risen above the value in a gold futures contract when the contract closes, that trader has effectively earned a profit as they can take ownership of the gold and then immediately sell it in the spot market for a higher amount.

Other Ways To Invest

Those interested in commodities trading can also invest in managed futures, which, like mutual funds and ETFs, are a collection of assets. However, these bundles focus on futures contracts rather than other securities and derivatives.

There are also commodity pools, which are like private funds and investors must be approved before purchasing a share in them.

For those that want indirect exposure when trading commodities, you could invest in a company that has a share price that is correlated to the price of the asset. For example, the share prices of many oil firms like Esso Petroleum Co Ltd will likely be linked to the price of oil itself.

Tips For Commodities Trading

Risk Management

Commodities are notoriously volatile and, if you can, you should implement risk management using advanced order types, such as stop losses and trailing losses.

A stop loss order will automatically close your position once the asset value reaches a certain level. So, if the price of a commodity were to suddenly drop due to an unforeseeable event, this mechanism would help reduce your losses.

The trailing loss order builds on this, setting a stop loss a set distance behind the asset’s value, so that unforeseen losses are still mitigated but the loss level will rise with the market beforehand. This means that, should the market rise significantly, the stop loss will be moved to above the profit level, guaranteeing a positive outcome in this case.

Keep Informed

This is especially important for those that want to incorporate fundamental analysis into their commodities trading strategies. However, whichever approach you utilise, ensure that you are aware of the supply and demand factors influencing the price of a commodity. Whether that be a natural weather event, geopolitical instability or a slowdown in economic growth, you need to be able to respond to these events and the changing data by adapting your strategy accordingly.

Also, make sure to continue making an effort to improve your skills. There are many pdf documents available online, as well as educational material available on broker and trading websites (e.g. Fidelity International has an article on trading commodities and Questrade has an article dedicated to CFDs).

Traders can also subscribe to trading magazines or newsletters, listen to a podcast, purchase a book (e.g. Commodities For Dummies, Commodities Trading for Beginners or a commodities book by Ken Roberts) or even embark on an online training course, which gives a deeper understanding of trading commodities. Udemy offers these and Trading 101 offers webinars, amongst other things, to teach people how to trade CFDs and stocks. Quizlet even has flashcards on the CFTC (Commodity Futures Trading Commission).

Much discussion on commodities trading takes place on online platforms and forums, such as Reddit, Quora and the Wall Street Oasis (WSO). YouTube has many videos which assist traders in commodity trading (and have explained various concepts in simple terms). A study/academic research paper has also been written on investment and speculation in trading commodities which is available online.

Compared to the past, there really is no excuse for not locating suitable training resources when trading commodities.

Choose The Right Way To Invest

With so many financial products and instruments available when it comes to commodities trading, it can be easy to feel overwhelmed or a temptation to randomly pick a way of investing.

Choosing the right financial instrument or product to invest in is key, though this varies from trader to trader with experience, risk tolerance and whether they desire to own the asset or simply speculate on it.

For example, if you want to actually own a share in an oil company, you should purchase a share directly in that company. However, for those that want exposure to the company but are not particularly interested in owning a stake, an ETF that includes that firm or a CFD may be more appropriate.

Commodity Trading Strategies

Trend Following

Although markets for commodities trading can be volatile, stepping back and looking at the price movement of a particular commodity over a longer period of time can reveal larger trends (either positive or negative).

This strategy involves first being able to identify the existence of a trend and then being able to spot suitable entry and exit points.

Commodity trading strategies

Traders must be confident that it is indeed an upward or downward trend, rather than just small fluctuations within a specific range (i.e. between support and resistance levels). If the upper or lower boundary is repeatedly penetrated, this could be a sign that the market is following an upward or downward trend.

A key skill is being able to enter the market at the beginning of the trend and exit before any reversal in the trend. It may be necessary to incorporate fundamental analysis for this.

Breakout Trading

This is a trading strategy in which the trader identifies the point at which the price of an asset will increase or decrease beyond its support or resistance levels. The trader should open their position once the support or resistance level is broken and then close their position as soon as the price settles or before it begins its reversal.

This is a short-term strategy and works best in commodities trading when there is a strong trend (either positive or negative).

Range Trading

The price of an asset may, for some period, fluctuate within a particular range (i.e the support and resistance levels). If a trader is able to identify when this is happening, they can buy the asset when the price is at the lower end of the range and sell when it reaches the higher end.

One difficulty is that it can be tricky to be certain when an asset is fluctuating within a range or whether the price will move more significantly as part of a positive or negative trend. Also, if an asset is in oversold territory and close to the lower band of the range (i.e. the support level), the price may remain in this territory for quite some time, which can make it difficult to know when is best to enter the market.

Trading Based On Fundamentals

The above strategies for commodities trading utilise technical analysis (and possibly quantitative (quant) skills), where traders must carefully critique charts and graphs in an attempt to correctly predict the trajectory of an asset. However, you can also use fundamental analysis to predict which direction the price of an asset will head next.

Fundamental analysis involves looking at upcoming economic, political and social events, as well as general market news, to gain a real understanding of the forces driving the price of the commodity in question. For example, let us say OPEC are likely to restrict the supply of crude oil – the basic laws of economics tell us that this is likely to drive up the price of crude oil. Those trading commodities (specifically, crude oil) could look to capitalise on this. Also, pay attention to changes in economic activity in major economies, such as the Chinese economy, as this will often have a significant impact on certain commodity prices.

The downside of this approach is that it can take a significant investment of time to get a regular news update on commodities trading and analyse the technical details behind these. There is also the belief that the fundamentals of a commodity are already factored into its price anyway, so attempting to profit through analysing the fundamentals is unlikely to be successful.

Benefits Of Trading Commodities

  • Large range of financial products and instruments
  • Volatility provides opportunities for speculators to profit
  • Commodities trading hours tend to be longer than traditional stocks

Drawbacks Of Trading Commodities

  • Some financial instruments are leveraged, which comes with increased risk
  • Some of the technical and fundamental analysis is quite complex and perhaps not suitable for novice traders

How To Start Trading Commodities

The world of commodities trading is unfamiliar to many, so we have compiled a step-by-step guide below, detailing how you can get started.

1 – Find A Broker

The first step is finding a suitable broker for trading commodities. Take a look at reviews of commodity brokers (e.g Upstox) and check whether they offer the financial products and instruments that you desire. For example, CMC Markets focuses on spread betting and CFD trading, so you should only pick this broker if these instruments are appropriate for you. Trading212 offers a dedicated CFD trading account that includes commodities like crude oil. The company Revolut offers investment opportunities in precious metals.

Also, consider the fees, commission rates and spreads. Some brokers offer commission-free accounts on their platforms (Robinhood pioneered this). However, make sure you check all the other fees first, including spreads, overnight fees and deposit and withdrawal fees. eToro currently only charges overnight fees on CFD positions and not on non-leveraged buy positions for stocks and ETFs.

Check out what customer support and educational material are available from the broker. This is especially important for those new to the commodities market. For example, is there a live chat? Does the broker have a commodity trading guide? Are live webinars on commodity trading available to traders? Make sure they have a mobile app for commodities if you wish to trade on-the-go. A full guide to finding the perfect broker for you can be found here.

Once you have chosen a broker for trading commodities, all you need to do is register to open your account.

2 – Deposit Funds

Next, you will need to deposit funds in your account. Different brokerage firms will have different minimum deposits. You will need to consider how much you are willing to invest and the overall cost of your trading strategy, including fees. Also, consider the implications of using leverage and be aware that a margin call may necessitate you to deposit additional funds to keep your position open. This usually happens when the value of an asset has fallen and you will fail to meet the broker’s margin requirement unless you deposit additional funds.

3 – Open A Position

Now, it is time to open a position, which is easier said than done. Traders should time their entry into the market just right to maximise profit. Look to identify when the market is in overbought or oversold territory by looking at price fluctuations over the previous 6-12 periods (minutes, months, years).

In terms of actually opening a position, most brokers and trading platforms will make this fairly self-explanatory. A well-known trading platform like MetaTrader 4 or MetaTrader 5 will have a range of order types available to manage your risk. Some brokers, such as the Indian firm Kotak Securities, use different trading platforms so ensure you are familiar before proceeding to open a position.

Some traders may prefer to use an algorithmic trading bot, which is an automated trading system that many platforms and brokers support.

4 – Monitor

Next, you should monitor your position. Keep an eye on the fundamentals when commodities trading (i.e. the supply and demand factors influencing the prices of commodities), which may cause the trend to hold steady, accelerate or reverse. Many brokers will have economic calendars available on their websites that will show upcoming events (e.g. GDP statistics), which may influence the prices of commodities.

5 – Close

If you have made use of advanced order types, your position may close automatically. However, traders will often decide to close positions themselves, for example, if a flattening or reversal of a trend is predicted or if the price is about to hit a hard support or resistance level that it cannot surpass.

Trading Hours

The opening hours for the commodities trading market will depend on the particular asset being speculated. However, most markets are open almost 24-hours a day between Sunday and Friday evening, with the majority of major commodity markets being shut each week on Saturday. Hours and days will likely be different when investing in stocks, for example, on the London Stock Exchange, where trading hours are 08:00 to 16:30 GMT Monday-Friday (for those wanting to invest in companies linked to the commodities market).

Also, be aware of holidays for the particular commodities exchange you are trading on. Brokers and trading platforms, whether Zerodha, E*TRADE or eToro, will usually clearly indicate what the trading time and hours are. Nasdaq has a 2021 calendar to assist in seeing when the market is closed.

Essentially, whether you are in India or the UK, there is ample trading time for commodities.

Regulation

Commodities regulation is not new. In 1973, the Commodity Exchanges (Prohibition) Ordinance prohibited the establishment of further commodity exchanges in Hong Kong.

The US derivatives market is regulated by the Commodity Futures Trading Commission (CFTC), which was created by the Commodity Futures Trading Commission Act in 1974. This works to protect investors from certain practices, including in the futures and options markets. In the UK, the FCA plays a major role in regulating commodities trading, particularly with regard to derivatives. There are also several ways you can report concerns to the FCA as a whistleblower.

Traders should always check that their broker is authorised by the relevant regulator and has a license for commodities trading.

Final Word On Trading Commodities

Commodities trading provides huge opportunities for speculators to profit from price movements due to the volatility of different products. The range of financial products and instruments offered caters to traders with different risk tolerances and preferences. However, a level of technical and fundamental analysis is often required to profit, rather than simply gamble on, commodities and it is important to get the basics right first. We recommend that traders, especially amateur ones, make use of any educational material and demo or trading simulator accounts for commodity trading available on many brokers’ websites.

FAQ

Commodities Trading: What Is It?

Commodities are essentially raw materials, many of which can be traded on exchanges using a variety of financial instruments. Although many people trade commodities for commercial purposes, speculators also look to profit from the volatility of commodities.

Is Commodities Trading Halal Or Haram?

Islam prohibits the trading of futures contracts, which are common in commodities trading, as it is said that this is Haram. However, speculating on the spot market is considered Halal.

What Is A Commodities Trading Account?

Most large online brokers will offer trading accounts that include commodities, for example, crude oil, gold etc. Some of these accounts may be commission-free, with the trader paying for the service through spreads and other fees.

What Is The Most Traded Commodity In The World?

The most traded commodity in the world is crude oil, though there are many different types of crude oil. The two main ones, often considered the benchmarks, are West Texas Intermediate (WTI) Crude and Brent Crude.

What Is The Role Of Forwards And Futures In Commodities Trading?

Forwards and futures contracts are very similar, though futures tend to have standardised terms, whereas the exact terms of a forward contract can be varied. Both can be used when trading commodities, either for the purpose of speculating or to achieve certainty on price.