How to Trade Commodities – Ultimate Guide 2024

Trading commodities is one of the most popular ways of profiting from the global exchange of goods.

Commodities are a great asset to diversify your portfolio and benefit from changing macroeconomic trends.

To be a profitable commodity trader, you need to understand all the different commodities and how they interact with each other, as well as the investment vehicles and your disposal.

In this article, you’ll find all you need to know about what are commodities and how to invest in them.

Ready? Let’s go. 

How to trade commodities in 3 easy steps:

Step 1: Open a commodity trading account

It was not until after the establishment of the Commodity Futures Trading Commission (CFTC) and the passage of the Commodity Futures Modernization Act in 2000, that commodities started trading online. Before this, you could only buy or exchange commodities at the Chicago Mercantile Exchange (CME) or a few other over-the-counter exchanges. Since then online commodities, trading has evolved tremendously. Its no longer a preserve of the elite investors as different online trading platforms have introduced the trade to retail investors.

Today, numerous online trading platforms offer commodity futures trading. So what do you look for when registering with an online commodity trading brokerage? First, ensure it is registered and regulated by the CFTC. You will also want to consider the brokers trading fees and commissions, the number of commodities supported, trading platforms supported, and their ease of use as well as the minimum deposits.

To help you register a commodity trading account with the right broker, we have reviewed the online commodity trading industry and recommended these three top trading platforms:

Step 2: Learn How to Trade Commodities

What are commodities?

Commodities are raw materials and basic goods used in commerce and industry to build more complex products and services.

Commodities are fungible, which means that they can be standardized and exchanged among them. This means that, for instance, two tons of wheat will have almost the exact same price anywhere on the planet.

One particular characteristic of commodities is that they are produced and traded in large quantities, guaranteeing a global supply and enough liquidity for the market.

There are four main types of commodities:

• Energy: these commodities include crude oil, electricity, natural gas, coal, uranium, gasoline, heating oil, and ethanol. Energy commodities have a massive impact on the production, distribution, and price of other commodities.
• Agricultural: all food crops (wheat, corn, soybeans, barley…), industrial crops (cotton, rubber, lumber…) and livestock (cattle, poultry, hogs…).
• Metals: precious metals (gold, silver, platinum, and palladium) and base metals (iron ore, steel, aluminum, nickel, zinc, tin…).
• Environmental credits: this is the newest category of commodities, including carbon emissions, renewables energy certificates, and energy-saving certificates.

How commodities work

Depending on the category, each commodity will have particular factors that influence its supply and impact its price.

The main factors that drive commodity prices are:

i) Supply

Like any other asset in the market, commodity prices are inevitably driven by the available supply at a given moment.

If you want to trade agricultural commodities, you have to bear in mind crop yields, climate episodes like floods or droughts, global politics, and labor issues. For instance, if French winemakers go to strike, it may affect wine prices globally.

ii) Demand

The other side of the coin of commodity prices is global demand. In the case of the commodities, you have to consider which economies are more dependent on raw materials, as well as those countries who produce them.

A good example of this is China, a populous country that is rapidly becoming wealthy. A downturn in the Chinese economy would affect commodity prices globally, hugely in countries that export raw materials to the Chinese market, like Australia.

iii) Weather

Weather is a massive force in determining the supply and demand of commodities.

Heatwaves trigger the use of air conditioning, shooting up the demand for electricity. Hurricanes impact oil drilling and transport. Too much rain, or too little, impact crop yields.

You better keep an eye on the weather news if you want to be a profitable commodity trader.

iv) US Dollar

The American Dollar has been the world’s currency reserve for a few decades, so its performance has always an impact on commodity prices.

A strong dollar translates in lower commodity prices, as countries producing raw materials get fewer dollars for their sales. A weak dollar, in return, leads to higher commodity prices.

v) Substitution

When possible, the market players will try to use the cheapest commodity available.

You can’t use zinc instead of gold, but silver does the trick. A spike in the price of soybeans may translate into farmers switching to corn to feed their cattle. You have to bear in mind this economic principle if you plan on investing in any commodity.

Step 3: Commodity trading strategies

There are many strategies to trading commodities, but if you are a starter, you should focus on these two:

Fundamental Analysis

Traders use fundamental analysis to identify which factors influence the forces of supply and demand.

As mentioned above, commodities are impacted by tens of factors, so it’s imperative to do deep research to identify opportunities with strong fundamentals.

Fundamentals that affect commodities are, above all, production levels. Inventories and production output are great fundamental tools.

Macroeconomic data, like GDP growth, unemployment or interest rates offer solid data for fundamental analysis.

Technical Analysis

Some traders believe that fundamental analyses are not important, as the market has already priced them. They focus on studying price charts to identify price levels that were reactive in the past and maybe so again in the future.

There’s plenty of literature around technical analysis, if you are totally new, you can start here.

There is a big debate within the trading community about which kind of trading is better, although most traders use them both in a hybrid model.

Ways to trade commodities

Step 4: Execute your first commodity trade

If you want to start buying and selling commodities right away in the most user-friendly trading, we recommend that you register with a major broker of your choosing.

After a quick signup process, you should be good to go. Just do your research before about how well the broker handles commodity trading.

The pros and cons of commodities

Why you should consider trading commodities

The three main reasons for getting now into commodity trading are portfolio diversification, hedge against inflation and population growth.

i) Portfolio Diversification

Most investors have their portfolios filled with stocks and bonds. Adding some commodities makes your portfolio much versatile against possible macroeconomic swings.

ii) Inflation Hedge

We have seen the central banks around the world keeping a low-interest rate policy during the last couple of decades. This keeps inflation down, creating bubbles in assets like stock.

Sooner or later, the world will enter an inflationary season, and this will drive commodity prices up.

The rise of new geopolitical powers like China, the EU and India, and a multipolar world may weaken the current system of American dollar hegemony. A weaker dollar will most likely shoot up the price of most commodities.

iii) World Population

If the two previous points weren’t enough, check out the estimated population by the UN:

Even in the most conservative estimates, we will have around 9 billion people by 2050. Just by itself will drive up the price of crops, cattle, and textile-related crops.

As emerging countries grow wealthier. Their population will start consuming at the level of current rich countries.

Another issue to consider is the rapid rate of urbanization in the developing world. As millions of people leave the countryside to live in big cities, the demand for metal and energy will shoot up.

Glossary of commodity Terms

FAQs