Commodities trading basics: How to trade on the raw materials that power our world

The world of commodities trading offers a dynamic alternative to traditional stock and bond investments. Here you get to discover how fortunes are built on the raw materials that fuel our planet.

From the oil that powers industries, the gold that safeguards wealth, to the coffee beans that start your day, commodities provide a unique path to potential profits and portfolio diversification.

So, what exactly are these commodities that hold such power? And how can you, the aspiring trader, tap into this dynamic market?  Let’s delve deeper and unpack the world of commodities trading, breaking down the essential building blocks — the commodities themselves — and the strategies used to navigate their ever-shifting prices.

What are commodities and what is commodities trading?

Commodities are raw materials or agricultural products traded on global exchanges. These standardised goods, such as oil, gold, or wheat, are interchangeable within their specific category. Unlike stocks representing company ownership, commodities are tangible assets whose value fluctuates based on supply and demand dynamics.

Commodities trading involves buying and selling these assets to capitalise on price movements driven by various factors, including weather events, geopolitical shifts, and economic trends.

Commodity trading strategies

Speculation: Riding the price waves

Speculation is a key strategy in commodities trading, where traders capitalise on short-term price fluctuations. They essentially make educated guesses, aiming to buy commodities they predict will rise in value and then sell them for a profit. Conversely, they might sell commodities they expect to decline in price, benefiting by buying them back at a reduced cost.

Tools of the speculative trade

There are two main techniques that speculative traders can utilise:

An example of speculative trading in action is a trader noticing a rise in global oil production and speculating that oil prices will decline. They could sell oil CFDs, hoping to repurchase them later at a lower price.

Hedging in commodity trading: Locking in profits

Unlike speculation, which capitalises on price volatility, hedging is a risk management strategy used primarily by businesses directly involved in commodities.

It aims to safeguard profit margins from unforeseen price swings, acting as a buffer against market unpredictability.

In practice, hedging involves entering into options or futures contracts that counteract the undesirable outcome a business wants to avoid. Let’s explore two scenarios illustrating how hedging works.

Hedging therefore helps traders get a degree of certainty about costs and revenue, which makes decision-making easier. It also insulates against unexpected price swings that may cause losses while also helping to avert cash flow disruptions.

Diversification: Expanding into the commodities market

Think of your investment portfolio as a three-legged stool. If one leg weakens (stocks decline), the other two legs (bonds and commodities) can offer support and help maintain balance.

The main idea here is that commodities often have a low correlation to stocks and bonds. This means that when stocks or bonds experience a downturn, commodities might perform differently, potentially offsetting losses in other parts of your portfolio.

There are multiple ways to incorporate commodities into your portfolio

Strategies are great on paper, but how do you practically buy or sell commodities? Trading platforms are the answer. Let’s explore the different platforms available and grasp the various contract types they offer.

Where to trade commodities

Trading platforms are essential tools for accessing the market. Deriv is a renowned platform that gives traders access to real-time data, charting capabilities, and order types needed to execute your CFD or Option commodities trades.

Major commodity classes

Risks of Commodities CFD Trading

How to start trading commodities

If you’re considering commodities trading, here’s what to do:

Important note: Commodities trading carries inherent risks. Before investing, thoroughly research the markets and consult with a financial advisor if needed.

You can access commodities like Gold, Oil, Gas, Silver, and others with a Deriv MT5 account.  It offers a list of technical indicators that can be employed to analyse prices. Log in now to take advantage of the indicators, or sign up for a free demo account. The demo account comes with virtual funds so you can practise analysing trends risk-free.