rtmark
LearnBonds UK

Commodity Trading UK Guide 2020

Want to learn how to trade commodities? We'll explain everything you need to know about online commodity trading in the UK.
Michael Graw
Author: Michael Graw

Last Updated: October 14, 2020
Commodity Trading UK
Commodity Trading UK

Commodities like sugar, wheat, corn, and oil play a huge role in our everyday lives. But for many traders, these products are more than just staples. They’re also financial assets whose price offers opportunity for speculation.

Commodity trading involves profiting off of changes in the price of globally traded products like food staples, metals, and fuel sources.

If you’re thinking about jumping into commodity trading in the UK, this guide is for you. We’ll explain everything you need to know about online commodity trading, offer tips to help you get started, and review top brokers you can use to begin trading today.

Table of Contents

    How to Trade Commodities in 3 Steps

    Want to get started with commodity trading in the UK right away? You can get started in just three simple steps:

    Step 1: Open a Trading Account

    Choose a broker that offers commission-free trading on a wide range of commodities.

    Step 2: Fund Your Account

    Deposit funds to your trading account by debit or credit card, e-wallet, or bank transfer.

    Step 3: Demo and Live Trading

    Practice trading commodities in a demo account, then move to live trading when you’re ready.

    What is Commodity Trading?

    Commodities trading involves buying and selling physical products like food, metals, and oil. The goal is to profit off of changes in the prices of these commodities. For example, if you’re holding a metal like gold and the price of gold goes up, you can sell your gold for a higher price than you bought it for and turn a profit.

    Notably, commodity trading rarely involves taking possession of physical products. Instead, commodities are traded using several different types of financial instruments. We’ll get more into the different types of instruments you can use for online commodity trading below. But in general, this style of trading is beneficial because you get financial exposure to price changes in a commodity without having to actually own that commodity.

    This is much better than buying oil outright, for example. If you did that, you’d have to arrange for transport and storage of multiple barrels of crude.

    Most commodities are traded globally much like forex. Prices are driven by supply and demand, which can be very volatile in some markets. For example, the price of coffee is more or less steady around the world under normal conditions. But the price of wheat can skyrocket if there’s a drought or floods in a major wheat-producing region of the world that cuts off supply.

    For this reason, it’s important to understand what drives the price of the specific commodity that you’re trading. The price of oil is driven by different factors than the price of copper, and the two commodities may react to market-wide news in different ways.

    Soft Commodities vs. Hard Commodities

    Broadly speaking, commodities can be split into two different categories: soft commodities and hard commodities.

    Soft commodities are primarily agricultural products. They must be cared for by farmers, and the supply of these commodities can be impact by things like weather, environmental change, and even population trends. Popular soft commodities that are traded in the UK include:

    • Coffee
    • Soybeans
    • Wheat
    • Sugar
    • Cocoa
    • Cotton
    • Pork

    Popular commodities in the UK

    Hard commodities are generally products that are mined, such as metals and fuels. Supply of these commodities is generally stable, although it can be impacted by natural disasters, political conflict, and problems at individual mines. Demand for hard commodities is often linked to global economic growth. When the global economy is booming, demand for oil and building materials goes up so hard commodity prices rise. Popular hard commodities for trading include:

    • Gold
    • Silver
    • Copper
    • Platinum
    • Oil
    • Natural gas

    CFD Commodity Trading vs. Futures Trading vs. Options Trading

    There are several different types of financial instruments that you can use for commodities trading. It’s important to understand how each instrument works.

    CFDs

    CFDs, or contracts for difference, are offered directly by your brokerage. When CFD trading, the prices quoted come directly from your CFD broker – you’re not trading on an open marketplace. However, CFD prices closely track the price of the underlying commodity, essentially giving you the same financial exposure as if you owned the underlying product itself.

    Futures

    Commodity futures are virtually identical to CFDs from the trader’s perspective. However, whereas CFDs are offered directly by your broker, futures contracts are traded through a centralized exchange. That means that when you buy and sell futures, your broker acts only as an intermediary and prices are set on the open market.

    Options

    Commodity options are significantly more complex than either CFDs or futures. Options give you the right to buy or sell a commodity at a specified price on a specific day in the future. Timing is everything when options trading since your options contract becomes worthless after its expiration date. In the meantime, the value of your contract can change dramatically based on both the price of the underlying commodity and the time remaining to expiration.

    The advantage of options contracts is that they offer flexibility. You can buy and sell contracts with different expiration dates to hedge your bets, for example. Options trading is only suitable for very advanced commodities traders.

    Notably, CFDs, futures, and options all let you trade with leverage. That means that you can multiply the effective size of your commodities position. Let’s say you have £100 in your trading account. With 10:1 leverage, you could buy up to £1,000 worth of commodities through these financial instruments.

    What Commodities Can You Trade in the UK?

    You can trade dozens of different commodities in the UK. Let’s take a closer look at some of the most popular products for trading.

    Agricultural Products

    Agricultural products are some of the most widely traded commodities in the world. After all, feeding the growing global population is a huge undertaking and massive quantities of food are shipped around the world every day.

    Agricultural commodities tradingSome of the most popular agricultural commodities traded in the UK are:

    • Coffee
    • Sugar
    • Wheat
    • Soybeans
    • Orange juice
    • Cocoa
    • Rice
    • Cotton

    There are many more agricultural products that can be traded, including barley, lumber, livestock, and dairy. However, you won’t find agricultural commodities trading to be as widely available among UK stock brokers.

    Metals

    Precious metals tradingThe most commonly traded metals in the world are gold, silver, and copper. Gold and silver are prized as precious metals that have their own inherent value. The price of these metals typically moves in the opposite direction of the stock market, making them popular among stock investors who want to diversify their portfolios.

    Copper, along with lesser traded metals like aluminum, platinum, and palladium, is often traded as a building material since it’s used in wiring and plumbing. The price of these metals typically goes up when the global economy is booming and drops when the global economy contracts.

    Energy Products

    Energy products like crude oil, natural gas, kerosene, and heating oil are also highly traded. In fact, crude oil is the single most widely traded commodity not just in the UK, but in the entire world. The price of oil can be highly volatile, with the state of the global economy driving much of the overall direction of energy prices.

    Benefits of Commodity Trading

    There are a few important advantages to UK commodity trading, especially if you’re trading commodities to diversity your portfolio. While there are different triggers for price changes among commodities, most commodities don’t move in lockstep with the stock market. So, if you typically buy shares, trading commodities can help you mitigate your risk to a downturn in the stock market.

    At the same time, commodities can help you hedge against some economic risks like inflation. Whereas stocks and bonds typically lose value in the face of inflation, commodities tend to hold their ground. Some agricultural commodities can also hold their value or even gain in value during global economic slowdowns, when most other assets are losing money.

    Commodities are also volatile, and that can be an advantage in itself. Volatile assets are risky, but they may also provide more opportunities for profit. Many commodities react strongly to news events and economic conditions not just in the UK, but around the world.

    How to Make Profits in Commodity Trading

    Profiting from commodity trading in the UK takes time, practice, and dedication. You can make a profit when you buy CFD or futures contracts for a product and then the price of the product rises. You can then sell your CFDs back to your broker or your futures contracts back onto the open market at a higher price than what you bought it for.

    Alternatively, if you believe that the price of a commodity will go down, you can short sell CFDs or futures contracts for that product. If the price drops, you then buy contracts at a lower price to exit your position.

    Notably, since you can use leverage while commodities trading, you can make a profit even off of small changes in the price of the underlying asset. At leverage of 10:1, a 1% change in the value of, for example, wheat would change the value of your CFD or futures position by 10%.

    Commodity Trading Risks

    There’s always a risk when trading commodities that the trade will go against you. If you buy copper CFDs, say, and the price falls, you could be forced to sell your CFDs for less than you bought them for.

    Most brokers offer negative balance protection, so you can never lose more money than you have in your trading account. However, when trading with leverage, losses can happen quickly since every price change in the underlying asset is magnified in your position. Be sure to use stop loss orders to protect yourself against large financial losses.

    Commodity Trading Strategies

    It’s important to approach commodity trading with a clear strategy and stick to it. There are many different types of commodity trading strategies you can use. Let’s take a closer look at three strategies that are perfect for beginners.

    Range Trading

    Range trading is a useful strategy when a commodity’s price moves sideways between an upper resistance level and a lower support level. The price can repeatedly bounce up and down between these two levels, offering opportunities to trade as it moves.Range trading commodities

    The key to range trading is identifying the upper and lower bounds through technical analysis. Bollinger Bands can often reveal a commodity’s price range, but in some cases you’ll need to draw trendlines yourself. In any case, be wary of potential breakouts above or below the range that require a different approach.

    Trend Following

    Commodities can be highly volatile in the short term, but the prices of many products trend over a scale of months to years. Trading in the direction of the trend can not only be very effective, but also provide a level of insurance for your trade. Even if day trading goes against you one day, you may be able to hold your position and benefit from the broader trend a week or a month later.Trend following strategy commodities

    When using a trend following strategy, it’s important to keep a close watch on the strength of the trend. Momentum indicators like moving averages and MACD can be very useful for this purpose.

    Seasonal Trading

    One thing that’s unique about commodities compared to other types of assets is that they’re real-world products that people and businesses actually use. As such, there are seasonal fluctuations in the prices of many commodities.

    For example, the price of natural gas often goes up in the winter when many people are using it in their homes. The price of oil is often high during the summer when more people are travelling. The prices of agricultural products often rise and fall with the harvest.

    Understanding these seasonal price fluctuations, which can often be subtle, can help you correctly predict the direction of a trend or whether a commodity will break out of its trading range.

    Commodity Trading Tips

    Getting started with online commodity trading can be difficult. To jump start your trading, try these five tips:

    1. Take a Commodity Trading Course

    While this guide is a great place to start learning about commodities trading, a UK commodity trading course can help you dive much deeper into the market. Many top commodities traders offer courses online, as do a handful of brokers. Some even offer personalized feedback on your trading so that you can adjust and improve your trading as you go.

    1. Read the Best Commodity Trading Books

    Another great way to get a deeper understanding of how commodities trading works is to pick up a commodity trading book. Some of our favourites are “A Trader’s First Book on Commodities” by Carley Garner and “Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market” by Jim Rogers.

    1. Try a Commodity Trading Demo Account

    With a commodity trading demo account, you can dive into commodities trading without putting real money on the line. This is a great way to try out strategies and learn about price movements in a specific product. Using a demo account can also help you get acquainted with your broker’s trading tools.

    1. Start with One Commodity

    It’s easy to get excited by the range of different commodities you can trade. But starting with one commodity can help you focus and practice your skills. Become an expert on that single product and understand all the factors that influence its price before moving on to trading another commodity.

    1. Protect Against Downside

    An important part of succeeding as a commodities trader is to limit your losses. You don’t have to win every single trade, but you do have to prevent bad trades from wiping out all your profits.

    To do that, we recommend placing a stop loss order with every trade. With a stop loss, your broker will automatically close your position if the trade goes against you. You can also set trailing stop losses, which rise as the value of your position rises, to lock in profits after a successful trade.

    Best Commodity Trading Platforms

    Getting the best commodity trading platform is extremely important. Your broker controls everything from what instruments you can use to trade commodities to how much it costs. So, let’s review five of our favourite commodity brokers in the UK.

    1. eToro - Overall Best Commodity Trading Platform UK

    eToro is our top-rated UK broker for buying and selling commodities. This broker offers CFDs for 15 hard and soft commodities, including uncommonly traded metals like nickel and platinum. Even better, oil is available for trading through both CFDs and futures contracts.

    What really sets eToro apart is that it comes with a massive built-in social network. You can start discussions with other traders and quickly gauge market sentiment around a specific commodity. eToro also supports copy trading, which allows you to automate your trades based on the positions of professional commodity traders.

    Trading with eToro is completely commission-free and the broker’s CFD spreads are among the lowest in the industry. Copper CFDs start at just 2 pips (0.02% per trade), while oil trades at 5 pips and gold at 45 pips. If you want to trade comomdities on your mobile, eToro also offers one of the best trading apps.

    Our Rating

    • CFDs and futures for oil
    • Trade metals like nickel
    • Built-in social network
    • Extremely low spreads
    • Withdrawal fee of £4
    75% of investors lose money when trading CFDs.

    2. Plus500 - Commodities Trading with 150:1 Leverage

    Plus500 is another top commodities CFD broker in the UK. This platform offers trading on 22 different commodities, including livestock such as feeder cattle and lean hogs.

    One of the best things about Plus500 is that you can trade with leverage of up to 150:1 on gold, silver, wheat, and more. Coffee trades with leverage up to 100:1, and even products like cattle can be traded on margin up to 20:1. These high leverage rates make Plus500 ideal for placing large bets on the commodity market.

    We also like Plus500 because it offers a user-friendly trading platform. The broker’s charting interface is easy to use and offers nearly 100 built-in technical studies. Plus500 also has a mobile app, and any price alerts you set on the desktop will be automatically pushed to your phone for trading on the go.

    Our Rating

    • CFD trading on 22 commodities
    • Very high leverage on many CFDs
    • User-friendly trading platform
    • 0% commission and tight spreads
    • Charting platform isn’t very advanced
    80.5% of investors lose money when trading CFDs.

    3. Capital.com - AI-based Insights to Improve Your Trading

    Capital.com offers futures for crude oil and CFDs for more than a dozen additional hard and soft commodities. The broker has incredibly low trading spreads, starting from just 14 pips for oil contracts. Plus, all trades with Capital.com are commission-free and the broker charges almost no account fees.

    This trading platform stands out for its use of artificial intelligence. The AI algorithm will automatically analyze your trades to identify patterns around your wins and losses. Then, it will offer suggestions about how you can increase your profitability – perhaps by holding trades longer or focusing on a specific commodity.

    Capital.com also has a number of educational resources that are great for beginner commodity traders. You’ll find online trading guides and a free demo account, plus a dedicated mobile app with interactive trading lessons.

    Our Rating

    • Oil futures and a wide range of CFDs
    • Very low spreads
    • AI-based trading suggestions
    • Educational app and guides
    • Limited charting platform
    There is no guarantee you will make money trading with this provider.

    4. AvaTrade - Advanced Charting with MetaTrader 5

    AvaTrade offers commission-free online commodity trading through CFDs. The broker has slightly higher spreads than some of its competitors, but this is more than justified given the quality of the trading platform.

    In addition to offering its own charting software, AvaTrade gives all account holders access to MetaTrader 5. With this trading platform, you can create your own custom indicators and backtest strategies against historical price data. You can even use trading signals to automate your commodities trading and forex trading in the UK.

    AvaTrade allows you to trade with leverage of up to 200:1 for popular commodities like gold. However, the range of CFD offerings is more limited than at other brokers. You’ll find popular agricultural commodities like wheat and sugar, but not livestock, orange juice, or rice.

    Our Rating

    • Includes MetaTrader 5 trading platform
    • Leverage up to 200:1 for gold CFDs
    • Backtest and automate your strategy
    • Advanced mobile trading app
    • Higher than average spreads
    • Limited selection of agricultural commodities
    There is no guarantee you will make money trading with this provider.

    5. FinmaxFX - Trade Commodities Futures Contracts

    FinmaxFX is unique among the brokers we reviewed in that it offers trading on most commodities through futures contracts rather than through CFDs. You do have to worry about liquidity, but it is also possible to find more favourable prices on the open market than when trading CFDs directly with your broker.

    This broker offers a wide range of futures contracts with relatively high leverage. You can trade most agricultural commodities, including cocoa, sugar, soybeans, and cotton at leverage up to 100:1. Gold is available at 200:1 leverage, although all other metals and energy products are limited to 100:1 leverage.

    FinmaxFX offers traders access to MetaTrader 5, giving you the opportunity to create custom indicators and highly advanced strategies. The MetaTrader 5 app is also available on mobile and offers a comprehensive charting solution on the go.

    Our Rating

    • All commodity trading through futures contracts
    • Leverage of 100:1 for most commodities
    • Includes access to MetaTrader 5
    • Capable mobile integration with MetaTrader 5
    • Some liquidity challenges without CFD trading
    There is no guarantee you will make money trading with this provider.

    Commodity Trading Pros & Cons

    Pros:

    • Wide range of products to trade
    • Trade using CFDs, futures, or options
    • Use leverage to multiply your position
    • Commodities perform well in response to inflation
    • Excellent option for diversifying your portfolio
    • Different commodity prices are driven by different factors

    Cons:

    • Leverage increases your trading risk
    • Spreads can be high for some commodities

    How to Start Commodity Trading

    If you’re ready to dive into online commodity trading, the first step is to sign up for a new brokerage account. We’ll walk you through the process with eToro, which offers commission-free CFD trading, and show you how to place your first trade.

    Step 1: Open a New Commodity Trading Account

    Head to eToro’s homepage and click the ‘Join Now’ button. You’ll need to create a new username and password, then enter personal details like your name, email, and birthdate.Sign up for an eToro account

    To comply with government regulations, you’ll also need to verify your identity. You can do this online by uploading a copy of your passport or driver’s license and a copy of a recent utility bill.

    Step 2: Fund Your Account

    You can fund your eToro account using several convenient methods. The broker accepts credit and debit cards, e-wallets like Neteller and Skrill, and bank and wire transfers. Just keep in mind that eToro requires a minimum deposit of £140 when you open a new account.Deposit funds at eToro

    Step 3: Place Your First Commodity Trade

    Now you’re ready to place your first online commodity trade. Search for your favorite commodity, like ‘Gold,’ in the box at the top of the eToro dashboard. When it appears, click ‘Trade.’

    That will open a new order form. Enter how much money you’d like to trade with (eToro requires a minimum trade size of £40) and specify whether you’d like to apply leverage to your position. We also recommend adding a stop loss level to your trade to prevent against large losses.etoro commodity trading

    When you’re ready, click ‘Trade’ to buy your first commodity.

    Conclusion

    Commodities trading in the UK offers traders the ability to speculate on the price of products that are widely traded around the world. You can trade many different commodities, including agricultural products, metals, and energy products. Commodities trading is advantageous particularly for stock traders because the price of commodities often moves out of sync with the broader market.

    Ready to trade commodities online? Get started today by opening an account with eToro!

    eToro: Best Commodity Trading Platform UK

    Our Rating

    • Trade a range of commodities with low fees
    • Social trading network
    • Copy top traders
    • Accepts PayPal
    • FCA regulated
    75% of retail investor accounts lose money when trading CFDs with this provider.

    FAQs

    How does commodity trading work?

    You can get financial exposure to the price of a commodity without actually owning it by trading CFDs, futures, or options. If you buy a contract for a commodity and its price rises, you can sell your position for a profit.

    What is the best online commodity trading site for a beginner?

    Beginner-friendly commodity trading platforms will offer easy to use charts and educational guides that don’t overwhelm. eToro does a nice job of this, and you can use the social trading network to discuss commodities with more experienced traders.

    What is the best commodity trading app?

    We like the eToro app for commodity trading on the go. It offers commission-free CFD trading, user-friendly charts that are adapted for mobile, and a handy market news feed.

    How much money can you make in commodity trading in the UK?

    There’s no limit to how much you can make while trading commodities. That said, it’s important to manage risk and keep your expectations realistic. Start small and grow your account over time.

    What is open interest in commodity trading?

    Open interest is the number of futures contracts for a commodity that are open at the end of a trading day. Increasing open interest is often a sign of strength behind a price move.

    All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
    Michael Graw

    Michael is a writer covering finance, new markets, and business services in the US and UK. His work has been published in leading online outlets and magazines.