Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are further divided into soft commodities and hard commodities. Hard commodities are natural resources that are mined or extracted, such as gold, silver, and oil. Soft commodities are agricultural products or livestock such as corn, coffee, sugar, and wheat.
Traders can invest in commodities in multiple ways. The most popular method of investing in commodities is by buying a futures contract. You also can purchase commodities through ETFs. Some of the U.S. commodity exchanges are the Chicago Mercantile Exchange, Chicago Board of trade, New York Board of Trade and New York Mercantile Exchange.
Different categories of commodities
Agricultural commodity trading
The commodities that fall under this category are sugar, coffee, cocoa, cotton, corn, and wheat. Many assume that agricultural markets are not thickly traded, but that’s a myth. In fact, coffee is the second largest commodity in the world, after oil.
The factors which impact the price of agricultural commodities are supply/demand, weather, trade agreements with other nations, new technology, taxation, etc. There are regulatory bodies that decide how a particular commodity should be produced and sold.
Energy commodity trading
This is an extremely popular category of commodities that includes Brent crude oil, WTI crude oil, gasoline, and others. The reason why these commodities are important is that they are an integral part of numerous industries. They have the power to move an entire economy. For example, an increase in oil prices will affect aviation companies, paint industries, tire companies and many more.
Countries like Russia and Saudi Arabia heavily depend on oil for revenues. Factors such as supply and demand play a major role in determining oil prices. Some other factors (which are specific to oil) include OPEC (Organization of the Petroleum Exporting Countries) meeting outcome, political statements, International agreements, etc.
Metal commodity trading
This category includes precious metals like Gold, Silver, Platinum, and Palladium. Earlier trading in precious metals was only possible by rich investors, but now with the introduction of CFD trading, traders can easily invest in metals along with wide leverage options. Supply and demand once again affect the prices of gold and other metals. Other factors include economic changes in China and India (as they are the world’s largest consumers), taxation, and Federal reserves’ interest changes.
Commodities on Forex Brokers
Despite the fact that Forex is primarily a market for trading a variety of currencies, most Forex brokers offer a wide range of other various trading assets to their customers. By doing this, these brokers are helping their customers in diversifying their investments.
Currency trading brokers allow trading precious metals such as gold, silver, and platinum. Traders can also invest in energy commodities that include crude oil and natural gas. Forex brokers that provide commodity derivatives and CFDs are getting more and more popular and in-demand than the brokers who deal with only currencies and nothing beyond.
Guidelines to Commodity Trading
Novice traders should look at broad trends while investing and trading individual commodities. They could look at levels of crops being produced, metals being mined, and the oil extracted. Because these factors can give them clues about the direction of the market. Similar to this, inventory levels can also be a great tool for analyzing commodity markets. Continuous drawdown in inventory levels can lead to higher prices, while inventory buildup can lead to lower prices.
Technical analysis is another widely used method to trade commodities. This type of analysis uses historical prices and trends to predict the future. True technical traders do not pay any attention to fundamental factors but just price-action. But, our recommendation is to look at both fundamental factors and technical analysis in order to get the best trading results while dealing with commodities.
We hope you had a good read. If you have any questions, let us know in the comments below. Cheers!