We depend on different commodities to power the global economy. No one nation or entity has all the commodities, which is why commodities are traded across the world. But what is commodity trading strategy, and how is it done??
Commodity trading is the exchange of various commodities, such as agricultural products, crude oil, natural gas, and metals, via futures contracts, ETFs, forward contracts, options, and so on. Speculators can also bet on the price movement of various commodities via CFD contracts with online brokers. At the end of the article we provide you with several examples of commodity trading strategies.
What are commodities?
Commodities are raw materials used to manufacture finished items. Examples include agricultural products, such as cocoa, coffee, cotton, wheat, and sugar; precious metals, such as gold and silver; industrial metals, such as copper and steel; and fossil fuels, such as crude oil and natural gas.
They form the basis of our economy, as the raw materials are needed for the production of food, energy, clothing, and ornaments or even serve as a store of value.
What does commodity trading mean?
Commodity trading is the exchange of various commodities usually via futures contracts, forward contracts, and options. While it is mostly engaged by real players in the industry who need physical delivery of assets, many speculators also bet on the price movement of various commodities.
Speculators also trade via CFD contracts with online brokers. If they believe the price of a commodity will rise, they buy certain futures contracts (or go long), and if they believe the price will fall, they sell other futures contracts (or go short).
Given the importance of commodities in daily life, commodity trading began long before modern financial markets, as ancient empires established trade routes for exchanging goods.
The different categories of commodities
Commodities are typically classified into four broad categories: metals, energy, livestock and meat, and agricultural.
Metals
These include precious metals, such as gold, silver, platinum, and palladium, and industrial metals, such as copper, zinc, and steel. Industrial metals are used in the industries, while precious metals are mostly used to make jewelry and ornaments. Investors can also buy precious metals to protect themselves from high inflation or a drop in the value of their currency.
Energy
Examples of energy commodities include crude oil, heating oil, natural gas, and gasoline. These are fossil fuels and their products, which are used to power our homes, industries, and automobiles.
Meat and livestock
Lean hogs, pork bellies, live cattle, and feeder cattle are common examples of livestock and meat commodities.
Agriculture
Corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar are examples of agricultural commodities. They are sometimes referred to as soft commodities.
How can you buy and trade commodities?
The most common way to trade commodities is by buying and selling contracts on a futures exchange. Futures contracts are standardized and can easily be traded by anyone. To trade futures, you must first open an account with a brokerage firm specializing in these trades.
Other ways of trading commodities include options, CFDs, physical commodity purchases, commodity pools and managed futures, and commodity stocks.
A history of commodity trading
Commodity trading is at least as old as the financial markets, if not older. The first organized exchange for trading commodities was established in Amsterdam in 1530.
Commodity trading strategies
We end the article by summarizing all the commodity trading strategies we have published on this website:
- Gold weekend trading strategy (GLD swing trading)
- Trend-following system/strategy in gold (12-month moving average)
- The greatest gold stock system you should trade
- When gold gaps up or down (gold gap strategy)
- How to trade and invest in oil stocks (trading strategy and seasonality)
- The Friday Seasonality in USO (oil)
We have covered commodity trading strategies in more detail in another article:
