How to trade commodities: a complete guide

Learning how to trade commodities opens up a whole new side of the markets, from gold and oil to coffee and natural gas. These assets are driven by real supply and demand as well as global events, offering a welcome way to diversify beyond currencies and shares.

Gaining exposure to commodity markets means you can take advantage of price swings across a broad range of goods, each with its own character. Whether prices are rising or falling, there are trading opportunities to be found for those willing to learn how these markets work and approach them with a clear plan.

What are commodities?

Commodities are raw materials and basic goods that can be bought, sold, and traded, forming the building blocks of the global economy. They fall into two groups:

• Hard commodities are natural resources that are mined or extracted, such as gold, oil, and copper.
• Soft commodities, on the other hand, are grown or farmed, including coffee, wheat, and sugar.

Today, you can access commodity markets through a range of instruments, making it easier than ever to trade them without owning them physically.

How do the commodities markets work?

Here’s how the commodities markets work:

• Supply and demand set the prices: the value of raw materials and natural resources rises and falls with how much is available and how much the world needs, from crude oil to wheat.
• Trading happens worldwide: commodities are bought and sold on global markets, linking producers, buyers, and traders across every time zone.
• Markets stay open around the clock: many commodities trade 24 hours a day, 5 days a week, giving you the freedom to act whenever it suits you.
• You choose where to focus: first, choose a market based on what you want to trade, be it metals, energy, or agricultural goods.
• Leverage extends your reach: trading with leverage lets you open larger positions with a smaller outlay, though it magnifies losses just as much as gains.

What affects the prices of commodities?

Here are the most important factors that move commodity prices:

• Supply and demand: the most fundamental force of all. These supply and demand drivers determine whether there’s a surplus or a shortage, which in turn shapes the commodity price you see on your platform.
  
• Geopolitical events: conflicts, sanctions, and political instability can send prices sharply higher or lower. Geopolitics often affects energy markets in particular, with benchmarks like Brent Crude and WTI Crude Oil especially sensitive to any geopolitical tension.
  
• Weather events and harvests: for soft commodities, a poor crop caused by drought or flooding can tighten supply and push prices up in a matter of days.
  
• Currency movements: most commodities are priced in US dollars, so a stronger or weaker dollar directly influences how each commodity price moves across the board.
  
• Market sentiment: the mood of traders matters too. When large numbers of traders, whether institutional or retail traders, decide to trade on the same expectation, that collective behaviour can amplify price swings.
  

What are the ways to trade commodities?

There’s more than one way to get involved in commodities, and the right choice depends on your goals, budget, and how hands-on you want to be. Below are four of the most popular methods:

1. CFDs

A CFD, or Contract for Difference, lets you speculate on the price of a commodity without owning the underlying asset. You simply agree to exchange the difference in price from when you open the trade to when you close it, meaning you can profit whether prices rise or fall.

For example, rather than buying physical gold, you might open a CFD position that tracks its price. If gold climbs after you buy, you gain; if it drops, you lose. This flexibility suits active traders, but because CFDs use leverage, they magnify losses as well as gains, so they should match your risk tolerance.

2. Spreads

Spread betting is another popular way to trade commodities on price movements alone. Like CFDs, it lets you go long or short, and both spread betting and CFD trading are widely used by those who want short-term exposure without owning anything physical.

For example, you might place a spread bet on the price of oil per point of movement. The more the price moves in your favour, the more you make; the more it moves against you, the more you lose. It’s a flexible approach, but the leverage involved means it carries real risk and calls for careful position sizing.

3. Futures

Commodity futures contracts are agreements to buy or sell a set amount of a commodity at a fixed price on a future date. They’re one of the oldest and most established ways to trade the commodity market, used by both speculators and businesses looking to hedge.

For example, an airline might use futures to lock in the price of fuel months ahead, protecting itself against sudden rises. A trader, on the other hand, might buy a contract purely to profit from expected price changes. Futures are powerful tools, but their size and complexity make them better suited to more experienced participants.

4. Stocks

Buying shares in companies that produce commodities is a more indirect route, and one that appeals to long-term investors. Instead of trading the raw material itself, you invest in the businesses that mine, drill, or farm it, gaining exposure through their share price.

For example, you might buy shares in a mining firm or an oil producer, or spread your risk across several through ETFs. These exchange-traded funds bundle many holdings into one, making it easy to add broad commodity exposure to a diversified portfolio.

How to place your first commodity trade step-by-step

Placing your first commodity trade is simpler than it looks. Follow these five steps in order, and you’ll move from choosing a broker to opening your first position with confidence.

1. Choose a regulated broker & your trading platform

Start by picking a properly regulated broker and a trading platform that suits your needs. Look for competitive spreads, a clear interface, and the markets you’re keen to trade.

A good platform should also offer solid risk management tools, such as stop loss and take profit orders, helping you stay in control from the very first trade.

2. Open and fund your account

Once you’ve chosen your broker, complete the registration and verification process. This is usually quick, requiring a few personal details and proof of identity.

After approval, add funds using whichever payment method suits you.

3. Build a trading plan

Before you dive in, set out a clear plan. Decide how much you’re willing to risk, where you’ll enter and exit, and what your goals are. A solid plan keeps your decisions consistent and stops emotion-based trading.

4. Choose your market

Next, decide which commodity you want to focus on. Watching how the commodity markets trade across metals, energy, and agriculture helps you pick one that matches your interests and plan.

5. Place your first order

Finally, track the price, choose your entry, and place your order. Remember that since most commodities are priced in US dollars, currency moves can affect your position too.

To sum up

Trading commodities offers a genuine way to diversify beyond currencies and shares, with a broad range of markets to explore. Take your time to learn how each one behaves, trade with a clear plan, and always keep sensible risk controls in place.

Ready to get started? Open an account with FxPro today.

How to trade commodities FAQ

Please note this is educational material, and should not be considered as a recommendation or trading advice.

Trade Responsibly. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.