Welcome to the world of commodity trading! If this is your first dip into the pool, our comprehensive guide gives you a clear foundation to start trading commodities confidently with Change.
Like many tradable assets and instruments, things can seem complex at first, but they become much clearer once you understand the basics.
So! Let's dive in and explore how commodities can fit into a modern trading portfolio.
Key Takeaways
- To trade commodities, choose a commodity market, decide how you want to trade (such as CFDs, futures, or ETFs), analyse the market, and place a buy or sell trade based on your outlook.
- Popular commodities include gold, silver, crude oil, natural gas, wheat, coffee, and other agricultural products.
- Commodity prices are driven by supply and demand, geopolitical events, inflation, weather, and global economic conditions, so understanding these factors is essential before placing a trade.
- Commodity CFDs let you speculate on price movements without owning the underlying asset, allowing you to trade both rising and falling markets with flexible leverage on platforms like Change.
What exactly are commodities?
Commodities are raw materials or primary agricultural products that serve as the building blocks of the global economy. They can be broadly categorized into four main groups: metals (e.g., gold, silver, copper), energy (e.g., oil, natural gas), agricultural (e.g., wheat, coffee, soybeans), and livestock (e.g., cattle, hogs). Unlike stocks or bonds, commodities are tangible assets with real-world demand, as they are essential for various industries and consumption.
Commodity markets are influenced by supply and demand, global conditions, natural events… For example, a drought can push wheat prices higher by reducing crop yields, while geopolitical tensions in major oil-producing regions can cause crude oil prices to spike almost overnight. Trading commodities involves speculating on price movements, either by choosing to go long (buying) or short (selling).
🌾You can explore our detailed guide to CFD trading if “going short and long” sounds a bit foreign.
Are there Benefits to Trading Commodities?
Commodity trading offers several advantages for investors and traders alike. They behave differently from traditional assets and can respond to distinct market drivers. Commodity CFDs on platforms like Change offer several potential advantages:
Portfolio diversifiers
Commodities provide a means to diversify investment portfolios beyond traditional asset classes like stocks and bonds. Their performance often has a low correlation with other financial instruments, which can help mitigate overall portfolio risk.
A potential hedge against inflation
Certain commodities, such as gold and other precious metals, have historically served as a hedge against inflation. When inflation rises, the value of these commodities may increase, preserving purchasing power.
Worldwide interest
Commodities are traded on international markets, allowing investors to gain exposure to various economies worldwide. This reach may create unique trading opportunities based on political and economic developments.
Trading with leverage
Through instruments like commodity Contracts for Difference (CFDs), traders can access leverage, boosting their market exposure with a smaller initial investment. However, leverage also entails higher risk, so it's crucial to use it prudently.
Trading commodities CFD with Change will allow you to increase market exposure using less capital. However, leverage also increases risk, and losses can occur more quickly.
How to Trade Commodities
Whether you're trading gold, crude oil, or agricultural products, the process follows the same basic principles. Here's how to get started:
1. Choose a Commodity to Trade
The first step is deciding which commodity market you want to trade. Popular choices include precious metals like gold and silver, energy commodities such as crude oil and natural gas, and agricultural products like wheat, coffee, and soybeans. Each market reacts to different economic and global events, so it's worth focusing on commodities you understand.
2. Decide How You Want to Trade
There are several ways to trade commodities, including CFDs, futures, exchange-traded funds (ETFs), and commodity-related stocks. The right option depends on your goals, experience, and preferred level of risk. If you're looking to speculate on price movements without owning the underlying asset, commodity CFDs on Change offer a flexible and accessible way to trade both rising and falling markets.
3. Analyse the Market
Before placing a trade, research the factors that could influence commodity prices. Supply and demand, inflation, weather conditions, geopolitical events, and changes in the global economy can all affect market movements. Combining fundamental analysis with technical analysis can help you identify potential trading opportunities.
4. Place and Manage Your Trade
Once you've identified an opportunity, decide whether you expect the price to rise or fall before opening your position. Consider your position size, use risk management tools where available, and continue monitoring the market until you're ready to close the trade.
Different Ways to Trade Commodities
One of the great things about commodity trading is that there isn't just one way to do it. Whether you want to actively trade price movements or take a longer-term investment approach, there's likely an option that suits your style.
Let's take a quick look at the most common ways people trade commodities.
Commodity CFDs
Commodity CFDs are one of the most popular ways to trade commodities, especially if you're interested in short-term price movements. Rather than buying barrels of oil or storing gold bars under your bed, CFDs let you speculate on whether a commodity's price will rise or fall without owning the underlying asset.
You can trade both rising and falling markets from a single platform. CFDs also allow you to trade with leverage, meaning you can gain greater market exposure using a smaller amount of capital. Keep in mind that leverage amplifies both potential profits and potential losses.
Commodity Futures
Futures contracts have been around for decades and remain a popular choice for experienced traders. They involve agreeing to buy or sell a commodity at a set price on a future date.
While futures are widely used by professional traders and businesses, they are generally more complex and typically used by experienced traders.
Commodity ETFs
If you'd prefer a more hands-off approach, commodity ETFs could be worth exploring. These funds track the price of a single commodity or a group of commodities, giving you exposure to the market without trading futures or owning the physical asset yourself.
Commodity Stocks
You don't always have to trade the commodity itself. Another option is investing in companies that produce or process commodities, such as oil producers or mining companies. Keep in mind, though, that share prices don't always move in line with the commodity they're associated with.
Physical Commodities
Of course, there's always the traditional route: buying the commodity itself. This is most common with precious metals like gold and silver. While owning the physical asset can appeal to some investors, you'll also need to think about storage, insurance, and security, making it less practical for active traders.
For many traders, commodity CFDs offer a strong balance between accessibility, flexibility, and speed of execution. They allow you to react quickly to market movements without the challenges of owning or storing the underlying commodity.
What Moves Commodity Prices?
Unlike company shares, commodity prices aren't driven by earnings reports or new product launches. Instead, they're influenced by real-world events that affect supply, demand, and the global economy.
Here are some of the biggest factors that can move commodity markets:
Supply and Demand
It all starts with supply and demand. If demand for a commodity increases while supply stays the same, prices tend to rise. On the flip side, an oversupply can put downward pressure on prices.
Weather and Natural Events
Weather plays a significant role in commodity markets. Droughts, floods, hurricanes, and poor harvests can all affect the supply of agricultural commodities like wheat and coffee, often leading to sudden price swings.
Geopolitical Events
Geopolitical developments can significantly impact commodity markets. Trade restrictions, sanctions, or conflict in major oil-producing regions can disrupt supply chains and send prices moving in a hurry.
Inflation and the Economy
During periods of high inflation or economic uncertainty, some commodities, particularly gold, often attract increased investor interest. Meanwhile, strong economic growth can boost demand for industrial commodities like copper and crude oil.
Keeping an eye on these market drivers can help you understand why prices move the way they do and make more informed trading decisions.
Understanding commodity CFDs and their risks
Commodity CFDs allow traders to speculate on the price movements of commodities without owning the underlying asset. When trading commodity CFDs, you are trading against the difference between the opening and closing prices for that asset. This approach provides flexibility, as you can take both long and short positions, potentially profiting from either rising or falling markets.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 60% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
How to trade commodity CFDs at Change
Getting started with commodity trading on Change is a straightforward process. Begin by heading to the Prices screen and selecting the "Commodities" tab, where you'll find a range of available instruments.
Leverage levels vary by instrument, with many commodities offering competitive leverage options. Most commodity instruments come with a default leverage of 10x, offering potential for amplified gains. However, when it comes to Gold, you'll find an enhanced leverage of 20x. Alternatively, there's also an option to trade in physically-backed Investment Gold, which offers a different approach with no leverage involved.
Open the Change app today and use your margin trading account to trade these popular markets and more!
Frequently Asked Questions
What are hard and soft commodities?
Hard commodities are natural resources that are mined or extracted, such as gold, silver, crude oil, and natural gas. Soft commodities are agricultural products that are grown or raised, including wheat, coffee, sugar, and livestock. Both are traded on global commodity markets, but their prices are often influenced by different factors.
Why are commodity prices so volatile?
Commodity price volatility is usually driven by changes in supply and demand. Weather events, geopolitical tensions, consumer demand, currency fluctuations, interest rates, and global economic conditions can all influence market prices. That's why careful risk management is an important part of commodity trading.
Can beginners start trading commodities?
Yes. Many retail traders begin with CFDs because they allow you to speculate on price movements without owning the underlying asset, using platforms like Change. Before you begin, it's worth understanding how leverage works, choosing a reliable and MiCA-authorised trading platform such as Change, and developing a trading plan that matches your level of experience and risk tolerance.
What's the difference between commodity CFDs and commodity futures?
Commodity CFDs and commodity futures both allow you to speculate on commodity price moves, but they work differently. CFDs don't require you to buy or sell the underlying commodity and don't have an expiry date in the same way that most futures contracts do. Futures are standardised agreements traded on futures markets to buy or sell a particular commodity at a set price on a future date.
Why is Brent crude one of the most traded commodities?
Brent crude remains one of the most traded energy commodities globally, serving as a key benchmark for international oil pricing. Changes in global demand, decisions made by major petroleum exporting countries, and supply disruptions can all influence Brent crude prices. As a result, many traders watch the oil markets closely for potential trading opportunities.
