How to Trade Commodities
Commodities are some of the most widely traded goods in the world so it's no surprise that trading on this market is also popular. They can also be easily traded with Tradu.
Before you begin, our guide will explain the different ways to trade commodities, so you can start to trade with confidence. Read on to discover more.
Commodity trading explained: read our guide
What are the different types of commodity trading?
There are many types of commodities you can trade. These include precious metals like gold and silver, agricultural commodities like wheat and corn, and soft commodities like coffee and sugar (which are part of the agricultural group). You also have energy commodities like natural gas and crude oil. Often, these are traded using financial derivatives, so you don’t have to own or store the actual product. This makes it easy to trade the commodity market, unlike the traditional method of physically having to hand over the goods.
There are multiple ways to trade commodities, and it's common to use leverage, where you can open a larger position with a small deposit, allowing you to magnify potential profits; however, it can also increase losses. You can read more about the risks and rewards of leverage in our detailed guide.
Futures and forwards
These are types of commodity agreements where two parties agree to buy or sell at a set price of a commodity on a specified date which signals the end of the contract.
Futures contracts, often referred to as commodity futures, involve tracking the daily price movements and agreeing on these up until the contract comes to an end. There is high flexibility as to when traders can enter and exit the market, and their high liquidity means that they can also be traded both ways, depending on the trader's prediction of the market direction of movement.
Forwards are traded privately and feature a predetermined end of contract date. This type of commodity trading doesn't take into account price movements, regardless of volatility within the market, so the buy or sell price is always set at the start of the contract.
While forwards contracts offer more flexible terms, they're usually not available to individual investors. Futures are traded via an exchange, generally through a broker, whereas forwards are traded over the counter, and therefore come with more risk.
Options
Options are a popular way to trade various commodities and give traders the right to buy (call options ) or sell (put options ) a commodity at a specified price during the time of the contract. However, traders are not obliged to execute their trade and may choose not to do so.
Being a leveraged product, options allow a trader to gain exposure to the commodity price with a smaller deposit and without owning the underlying asset. But it's worth remembering that, as well as magnifying any profits, this can also increase potential losses.
Please note you cannot trade futures, forwards or options with Tradu; their inclusion here is for informational purposes only.
CFDs
Contracts for difference (CFDs) are similar in the sense that traders speculate on price movements. Contracts are traded which relate to a value in the specific commodity market and are typically executed in the short-term. If an asset price is expected to rise, a trader will buy the CFD, and if it’s expected to fall, a trader will sell.
CFDs are types of commodity trading that use leverage and offer trades on both rising and falling markets. They’re also both financial derivatives, meaning a trader doesn’t need to own the actual asset as these products track the underlying commodity price.
Swaps
Swaps are a type of commodity trading that rely on derivative contracts and are usually traded outside of an exchange without a broker. They involve two parties making an agreement to exchange cash flows, relating to the price of an underlying asset or commodity. Swaps are often used to hedge against extreme price fluctuations in commodity markets.
Because these trades normally take place privately, they're not usually executed by individuals, but are limited to companies. Please note that swaps are not available with Tradu; their inclusion here is for informational purposes only.
Spot trading
This type of commodity trading involves trading at a commodity’s current market price and immediately exchanging cash for the asset. In real terms, the delivery of the instrument might take some time, but the buyer and seller make an agreement at that moment.
Unlike futures and forwards, this type of trading is not a form of financial derivative and therefore it’s often required that traders take actual delivery of physical commodities. It's more common for traders to use the spot market to hedge trades in derivatives. Please note that spot trading is not available with Tradu; its inclusion here is for informational purposes only.
A key factor in how to trade commodities is to fully understand what drives the price of commodities, such as supply and demand, and to develop a strategy. You can read more in our guides.
How to open a commodity trading account with Tradu
It's easy to open an account with Tradu. Signing up takes just minutes and once you're ready, you can begin to trade:
- Get learning: With our specially designed market, trading and platform guides you can build your trading knowledge across a variety of topics.
- Develop a trading strategy: Choose a commodity trading strategy that works for you.
- Execute your trades: Our trading platform is full of advanced features to help you choose the best time to place trades.
- Diversify: Once you've mastered how to trade commodities, you can expand into other markets. With Tradu you can trade listed stocks and CFDs on stocks and forex straight from your account.