Commodity Day Trading Explained
Commodity day trading requires a high level of skill which is why it's most often used by more experienced traders. For those new to commodity trading, it can be relatively risky. But for those with discipline and knowledge, day trading commodities can prove profitable.
Read on to discover more about the benefits and risks as well as some popular commodity day trading strategies.
Can you day trade commodities?
The simple answer is yes, it is possible to day trade commodities. Day trading involves opening and closing positions within the same day, making it a fairly intense and demanding way to trade. Unlike many other approaches, positions are never held for longer than a few hours, with many trades taking place within minutes or even seconds. While this can mean smaller profits, due to the short-term positions, placing multiple trades can provide enough opportunities to make gains.
While stocks are one of the main securities that are traded in this way, commodities including gold, silver, oil, coffee and cocoa also lend themselves to day trading. However, it's important to thoroughly research the assets you wish to trade and understand the factors which affect price movements of the commodity.
In general, when day trading commodities, you'll want to make sure the market you’re trading offers enough liquidity. You should also research their volatility and any correlation to other assets, including currencies.
For further reading, check out our comprehensive guide to day trading.
What are the best commodities for day trading?
Crude oil, gold and silver are some of the most traded commodities. These markets are highly liquid, which can offer ample day trading opportunities. Brent and WTI are the two main types of crude oil that hold unique positions within the energy market. They're both used as benchmarks for oil prices across the world and therefore attract a high number of traders. Gold and silver are commonly referred to as 'safe haven' assets, meaning they typically hold their value, even in volatile and uncertain economic climates. They're often used as a way to hedge against inflation by both individual traders and central banks.
By day trading commodities, traders hope to profit from short-term price movements and fluctuations due to factors such as supply and demand, inflation, news, interest rates and even major weather events.
Those employing a commodity day trading approach speculate on the price movement of these assets with the aim of making a profit. Common instruments include CFDs which allow a trade to be made, based on the underlying asset, without having to actually own the physical commodity.
Benefits of commodity day trading
Commodities can make ideal day trading assets because they're usually a unique security within their market. For example, the price of coffee is unlikely to be influenced by the supply and demand of another unrelated commodity such as natural gas. Whereas when trading assets such as stocks, factors affecting one company or industry can create a knock-on effect across the entire market.
Even in the case of gold and silver, where the gold/silver ratio can exhibit clues as to the future value of the assets, the commodities are not steadfastly correlated or pegged to one another.
Day trading commodities can be profitable when there is significant price movement of a particular asset. For example, savvy traders are likely to execute trades when there is news of a change in supply or demand of a specific commodity such as oil. And because day traders can speculate on price movements in either direction, profits can be made during both bull and bear markets.
Choosing to trade just one or two commodities can create a significant advantage for traders. It allows the opportunity for thorough research and trend analysis, rather than taking up positions across multiple asset classes with little background information.
Many commodities tend to safeguard against inflation, so traders can often make profits during these times, even by trading in the short term.
Finally, as with all other day trading, there is no overnight risk involved, or overnight charges incurred as all positions will be closed by the end of the day.
Risks of commodity day trading
Commodity trading can be high-risk and although day trading commodities offers opportunities for profit, like any trading it also presents a chance of making a loss. Choosing a short-term approach requires the ability to focus during often intense and highly volatile periods throughout the day.
It also requires a strong commitment to monitoring any open positions as being distracted, even for a short amount of time, could result in a loss.
Another disadvantage is that unless a commodity is seeing significant price movements, it might change very little in a day, resulting in relatively low profits. While this also means a reduced risk of incurring a heavy loss, it could be frustrating for those looking to grow their capital quickly.
As the idea of day trading is to make smaller gains more frequently than with longer term trading, dedication is needed to create a more significant return over time.
How to day trade commodities
It's important for any trader, whether new or experienced, to establish commodity day trading strategies before entering positions. Some common strategies used when day trading commodities include:
- Range trading: This commodity day trading strategy is used when the market moves between two levels for a certain period. A trader looks to identify the resistance and support levels of the value and executes trades within that range. Find out more about range trading.
- Trend trading: Identifying the trend of a commodity (up or down) is a day trading strategy that can determine whether to go long or short on a position. Discover more about trend trading.
- Momentum trading: This involves identifying larger price moves. Commodity day traders seek to open a position at the start of a strong price movement and close it when it loses momentum.
How to start commodity day trading with Tradu
1. Open your account: Sign up for your trading account online with Tradu. It takes just a few minutes.
2. Brush up your skills: Take a look at our market and trading guides and check out our platform features.
3. Decide on your commodity and trading strategy: Select which commodity you want to trade and choose the day trading strategy that suits you.
4. Open, monitor and close your position: Use our advanced platform features to your advantage.
5. Diversify: Trade multiple other markets including listed stocks and CFDs on forex, stocks and indices.