How to Make Money in Commodities Trading?

Being goods that act as inputs or raw materials for several industries, commodities are widely traded across the world. The prices of these commodities depend on several factors including the market forces of supply and demand. Political events, natural disasters, weather, economic conditions, and policies of various governments also tend to cause price fluctuations with respect to commodities. This makes the commodities market highly volatile, offering several attractive opportunities for traders.

The prerequisite to being successful in commodities trading is to gain an understanding of the market and the various factors impacting the price of the commodity in which you wish to trade. Investment in commodities is possible through the physical purchase of the items or by investing in the futures markets through a variety of methods. They include buying options on commodity futures contracts, ETFs (Exchange Traded Funds), shares of companies that deal in commodities (commodity stocks) or trading commodities CFDs (Contracts for Difference).

In what can be a high risk asset class, those who wish to start trading commodities should have a well-planned trading strategy. This should be developed after adequate research and incorporate strong risk management techniques.

What are the Benefits
of Trading

Commodities trading at one time was restricted to professional experienced traders. Over time, the introduction of instruments like CFDs and futures trading, along with technological advancements, have attracted individual investors. One reason people wish to invest in commodities is to diversify their portfolio beyond traditional stocks and bonds. Here’s a look at some benefits of trading commodities:

Diversification of Portfolio
The stock market and commodities have an inverse relationship. When commodity prices rise, stock prices tend to fall. To offset the impact of a decline in stock prices, investors can take positions in the commodities market. By adding commodities to their portfolios, traders can manage risks better. Rather than purchase an array of individual commodities, traders can invest in a commodity index which would include a range of commodities.

Protection Against Inflation
Inflation erodes the value of most trading instruments. However, when there is high inflation, the prices of commodities increase. This means that traders who had commodities as part of their portfolio would stand to benefit.

For Hedging Purposes
Commodities are considered a good hedge against geopolitical uncertainties. Geopolitical events such as political tensions, riots, wars, or even natural disasters cause a disruption in the supply chain. In many instances, this may lead to a scarcity of resources. This puts upward pressure on the price of various commodities. Traders can hedge geopolitical risks by including commodities in their trading portfolio.

Take Advantage of High Leverage
Now that commodities trading can be done via derivatives like CFDs, traders can choose to use high leverage offered by online brokers. Leverage allows traders to take big positions in their chosen securities by paying only a very small part of the total trade value. Leverage offers traders the opportunity to magnify their profits with a low capital investment. Just like forex, a small increase in the price of the underlying commodity can return an investor a lot of money.

Which Commodities
are the Most Traded?

Being affected by a wide range of economic and non-economic factors means that commodity prices are highly volatile. The demand and supply of them also varies as a result of the different ways they are produced. Hard commodities (gold and silver) need to be mined, crude oil and natural gas are extracted, while soft commodities consist of agricultural products such as crops (soybeans, coffee and grains) and livestock.

In the global financial markets, commodity prices are expressed in terms of the US dollar. The most traded commodities in the world are crude oil, natural gas, gold, and silver.

Crude Oil

Crude oil can be refined into petrol, diesel, petrochemicals, and lubricants. Used by several industries, crude oil is by far the most traded commodity. Two major types of oil are used to benchmark global prices - Brent Crude and West Texas Intermediate (WTI).

Brent Crude is a high quality sweet and light oil with low sulphur content and density. It can be easily refined into various usable products. This type of oil is drilled from oil fields in the North Sea, off the shores of the UK and Norway.

WTI Crude is even lighter than the Brent crude. This oil variant is drilled mainly in the American states of Texas, Louisiana, and North Dakota. WTI has a sulphur content of 0.24% versus 0.37% in Brent crude. WTI is considered ideal for production of gasoline, while Brent is preferred for diesel production.


This precious metal has wide industrial applications. It is used in solar panels, circuits, and photographic films, besides being used in jewellery making. Extracted from the ores of other metals like copper, silver prices are impacted by the demand for these metals. Silver prices generally mirror gold prices.

Other precious metals that are traded include platinum and palladium.

Natural Gas

This non-renewable hydrocarbon extracted from below the earth is a major source of energy for generating electricity. Also used as fuel for vehicles and chemical feedstock in manufacturing industries, natural gas is typically high in demand, especially during times of economic growth.


One of the highly demanded commodities, gold finds its way into investor portfolios because of its status as a safe-haven investment. Its growing applications in the manufacture of electronics has added to its demand and made it one of the most traded commodities. Mined in China, Australia, Russia and the United States, gold has always been considered an asset to preserve value for the long term, especially during times of economic or political uncertainty. Due to its extremely high value, a growing number of investors are using Gold CFDs as a way to invest in it.

How to Trade

The important position held by crude oil in the global economy makes trading in this commodity a highly interesting option for traders. Sharp fluctuations in oil prices offer several opportunities for traders. If you wish to gain exposure to crude oil, the first thing to do is to choose whether to trade spot oil, a derivative product like futures and options or join a growing list of speculators using CFDS. Once you have chosen the instrument, you need to understand the oil market fundamentals (the factors affecting its demand and supply) and use fundamental and technical analysis to determine where to enter and exit a trade.

When trading crude oil, there are two popular grades that you can trade - Brent North Sea Crude and the West Texas Intermediate (WTI). Brent prices are used as a benchmark by OPEC countries and Europe, while WTI prices are the benchmark for the US.

Economic Reports to Look Out for When Trading Oil

The most important economic reports for oil traders provide updates on the number of crude inventories in the US. The weekly release of these reports can cause significant volatility in oil prices. The data on crude stockpiles gives an insight into the demand and supply of oil. If stockpiles continue to rise in the US, it indicates that supply is higher than demand, exerting downwards pressure on oil prices. This is mostly due to a decline in demand due to lower economic activity. On the other hand, if oil inventories continue to rise in the US, it indices that demand is higher than supply, which lifts oil prices.

The two most important reports of oil stockpiles are:

The American Petroleum Institute’s (API) report: The API releases a weekly report, which is usually every Tuesday at 16:30 ET. The report contains details of petroleum products that comprise over 80% of total refinery production. Crude oil stockpiles are also included in the report.

The Energy Information Administration’s (EIA) report: The Department of Energy’s EIA issues a weekly report every Wednesday at 10:30 ET. This report, too, contains details of oil supply and the level of inventories of crude oil and refined products.

How to Trade
Natural Gas?

Natural gas is widely used to manufacture electricity. The commodity is extracted from below the earth by a process called fracking and it is the third largest physical commodity traded via futures contracts.

Key factors affecting the demand and supply of natural gas are:

  • The level of reserves stored by countries to meet demand in times of short supply or higher prices

  • Demand from newer markets

  • Development of alternative fuels

  • Prices of alternative fuels

  • Weather conditions play a key role in the extraction of natural gas. Severe weather conditions like hurricanes or storms can lead to shutdowns and affect the production process.

  • Government policies and regulations related to fracturing may also impact natural gas prices. Several countries like Ireland, Scotland, Australia, and Germany have already banned fracking.

The top consumers of natural gas are the United States, Russia, China, Iran, and Indonesia. Traders can choose to trade natural gas via CFDs, which allow them to speculate on the prices of futures contracts without taking ownership of the underlying asset. Traders can enter into long or short positions depending on their perception of the market and future price movements.

Day trading strategy is highly suitable for trading in natural gas, since natural gas prices are typically highly volatile, presenting several opportunities during a trading session. Another option is to use the range trading strategy, using technical indicators to identify support and resistance levels and taking trade positions accordingly.

An important point that traders need to know is that natural gas prices move in a recurring or cyclical pattern due to weather conditions. Prices tend to increase in peak winter and summer months, while trending lower in other months. This cyclical movement makes it easy for traders to speculate on the future movements of natural gas prices.

How to Trade

The high liquidity offered by gold makes trading it highly popular among investors of all types. Gold is bought not only for its lustre and sheen, but also its value as a store of wealth and, in recent times, its industrial applications. Traders often fail to take advantage of the wide fluctuations in gold prices because of their inability to understand the gold market and the factors affecting gold prices.

Trading in gold is possible through the purchase of physical gold from bullion traders or through gold exchange traded funds (ETFs) that include the precious metals. Investors can also trade gold through funds that track the movement of the commodity or purchase gold CFDs. Day trading is popular for gold, where traders close their positions at the end of the day.

Gold futures are traded on COMEX in the form of standard gold futures, representing 100 troy ounces of gold and a micro gold future, which represents 10 troy ounces. The smallest movement of a futures contract on an exchange is $0.10 and the number of ticks the price moves determines a trader’s profit or loss. The tick value for a standard contract is $10, while for a micro contract it is $1. Traders also need to check the margin requirements of their trading account and the same can vary among different brokers.

Before you embark on trading gold futures or gold CFDs, do study the various factors that cause fluctuations in gold prices. These include factors that affect the demand for gold jewellery, industrial applications, economic factors (like inflation), stock markets and interest rates. Even geopolitical events tend to have a significant impact on gold prices. Central banks of several countries keep gold reserves and their buying and selling actions can lead to price swings. One can even study historical trends and charts to analyse changes in gold prices over the years and identify support and resistance levels to base their trading decisions on.

Make use of the educational and news resources offered by your broker when trading gold. Do not ignore news like increased output levels of gold mining companies, since this indicates that supply will increase, which in turn may lead to a fall in gold prices.

Established and reputable brokers offer gold CFD trading via popular platforms like MetaTrader 4 (MT4) and MetaTrader 5 (MT5), which are easy to use and simple to understand. These platforms allow one-click trading, several in-built tools to understand trends and identify support and resistance levels. Automated trading options offered by these platforms are incredibly useful for new traders who have limited knowledge of gold trading and do not wish to spend time monitoring the markets. The trading code for gold is XAU. Gold prices are denominated in US dollars per troy ounce and denoted as XAU/USD.

How to Trade

Silver is another precious metal that finds favour with commodity traders. High in demand because of its lustre and wide industrial applications, silver is also considered as a safe-haven investment option. Silver prices tend to be volatile, offering traders several trading opportunities with intra-day swings. Silver is also bought as a hedge against inflation. Silver can be bought physically in the form of bullion and coins or can be traded via futures, options and CFDs. Investors can also trade in silver by investing in exchange traded funds or buying stocks of companies engaged in silver mining.

Silver CFDs offer traders the opportunity to speculate on rising and falling prices. CFDs are widely preferred since they do not entail taking possession of the precious metal, are highly leveraged and allow traders a chance to enter both long or short positions based on their expectations of future price movements. Trend trading and range trading are the most popular strategies for trading silver. This requires traders to identify a trend by using historical charts and determine buy or sell positions. Trading in silver needs sound risk management tools like stop losses and take profit, especially if you are using high leverage.

XAG is the symbol for silver in the commodity market and XAG/USD is the price of silver and represents the number of US dollars required to buy one unit of the precious metal. A unit is one troy ounce of silver.

Why Choose CFDs
for Trading

Although there are several ways of trading commodities, CFDs have been gaining immense popularity. This is because of the several advantages offered by them.

Physical purchase of commodities is a time-consuming and cumbersome process with issues regarding safe storage. In contrast, opening a CFD trading account is quite simple. All you need to do is choose a broker and provide certain details along with the supporting documents for opening a trading account.

CFDs do not involve taking physical possession of the underlying commodity. Instead, they offer traders a chance to simply speculate on the future price movements of the commodity concerned. Advanced trading systems help provide high levels of liquidity which make it easy to buy and sell commodities CFDs. This makes CFDs the ideal for short term investing.

Trading CFDs allow traders to take a long (buy) or a short (sell) position depending on their expectation of future price movements. This means one can find trading opportunities in both rising and falling markets. This is unique to CFDs whereas other financial instruments involved buying and selling at a predetermined price.

CFDs are leveraged products, allowing a trader to gain higher exposure than the funds available in their trading account. High leverage means low margin requirements and the possibility of magnifying your profits. One must remember, however, that leverage can also magnify losses. Due to this, it is recommended to use leverage with sound risk management techniques.

Day trading, swing trading and scalping are some of the most popular CFD trading strategies used for commodities.

How to Trade
Commodities CFDs?

Here are the steps involved in trading commodities CFDs:

1. Identify the Commodity to Trade

The first step to trading commodities CFDs is to finalise the commodity or commodities you wish to trade. Initially you may choose to trade in well known commodities such as gold, silver and oil as they offer high levels of liquidity and minimal brokerage fees.

2. Choose a Broker

The next step is to identify a broker that offers CFD trading in your chosen commodities. Ensure that you choose a reputable and regulated broker, as this ensures the safety of your funds and transactions. When opening a brokerage account to trade commodities CFDs you should consider the leverage levels offered, spreads, customer support, funding options and the product range.

3. Develop a Trading Strategy

Once you have opened your trading account, you need to develop a trading plan keeping in mind your financial goals, risk appetite, funds available and the analysis methods you are most comfortable using. You can choose fundamental or technical analysis or a combination of the two to formulate your trading strategy. Reputable brokers offer adequate resources to help you carry out fundamental analysis as well as

4 .Select a Trading Platform

Advanced trading platforms such as MetaTrader 4 (MT4) are feature-packed. MT4 has pre-installed indicators and customisable chart that aid technical analysis. It also features a live information feed with access to an array of economic and macroeconomic data for those using fundamental analysis to trade. The power of MT4 lies in its flexibility. The trading platform is suitable for traders of all skill levels and also caters for money managers and Expert Advisors (EAs).

5. Test the Strategy on a Demo Account

Before you begin trading with real money, it is a good idea to open a demo account and test your strategy with virtual money. A demo account simulates live trading and gives you a feel of trading with real money and explore all the tools available on the trading platform. More importantly, it allows new traders to learn and understand key concepts such as leverage, stop-loss and margin call.

6. Begin Live Trading

Deposit funds into your trading account, check out the market price of the commodity you wish to trade, click 'buy' if you expect the price to increase or 'sell' if you believe the market will fall and select your trade size.

7. Risk Management

Do not forget to use stop losses and limit orders. They help minimise losses during periods of high volatility. The quality of your trading plan and the chances of its success will depend on your knowledge of the underlying commodity, the market for it and the factors affecting its price movement.

Remember, that outlining a plan is not enough, it also needs to be followed. Markets can be volatile, and you need to trust your trading strategy rather than making impromptu decisions. It is a good idea to backtest your trading strategy using your demo account and tweak it according to your new learnings.

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