How To Trade

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Commodity trading involves buying and selling raw materials like gold, oil, wheat, and natural gas. It’s one of the oldest forms of trading and remains popular due to its profit potential and role as a hedge against inflation.

This guide covers:
✔ Types of commodities
✔ How commodity trading works
✔ Best trading strategies
✔ Risks & how to manage them

1. Types of Commodities

Commodities are divided into four main categories:

A. Energy

  • Crude Oil (WTI, Brent)

  • Natural Gas

  • Gasoline, Heating Oil

B. Metals

  • Precious Metals (Gold, Silver, Platinum)

  • Industrial Metals (Copper, Aluminum, Zinc)

C. Agriculture

  • Grains (Wheat, Corn, Soybeans)

  • Softs (Coffee, Sugar, Cocoa)

  • Livestock (Cattle, Hogs)

D. Other Commodities

  • Electricity, Carbon Credits, Uranium

2. How Commodity Trading Works

Commodities are traded in two main ways:

A. Spot Trading

  • Buying/selling for immediate delivery (e.g., physical gold bars).

  • Common in retail markets (e.g., gold coins, oil barrels).

B. Futures & Derivatives

  • Futures Contracts: Agreements to buy/sell at a future date (most common method).

  • Options: Right (but not obligation) to buy/sell at a set price.

  • CFDs (Contracts for Difference): Speculate on price without owning the asset.

  • ETFs (Exchange-Traded Funds): Trade commodities via stocks (e.g., SPDR Gold Trust (GLD)).

Popular Commodity Exchanges:

  • CME Group (Chicago Mercantile Exchange)

  • ICE (Intercontinental Exchange)

  • LME (London Metal Exchange)

  • NYMEX (New York Mercantile Exchange)

3. Best Commodity Trading Strategies

A. Trend Following

  • Buy when prices are rising, sell when falling.

  • Uses moving averages & breakout signals.

B. Swing Trading

  • Hold positions for days/weeks based on technical analysis.

  • Works well in volatile markets like oil & gold.

C. Spread Trading

  • Profit from price differences (e.g., Brent vs. WTI crude).

  • Common in agricultural commodities (e.g., Wheat vs. Corn).

D. Hedging

  • Producers/consumers lock in prices to avoid risk (e.g., airlines hedging fuel costs).

E. News-Based Trading

  • React to reports like:

    • EIA Crude Oil Inventories (Wednesdays)

    • USDA Crop Reports (Monthly)

    • Fed Interest Rate Decisions (Affects gold & USD)

4. Risks in Commodity Trading & How to Manage Them

A. Price Volatility

  • Solution: Use stop-loss orders & diversify.

B. Leverage Risk (Futures/CFDs)

  • Solution: Trade with proper risk management (e.g., 1-2% per trade).

C. Geopolitical & Weather Risks

  • Wars, droughts, and supply chain disruptions impact prices.

  • Solution: Stay updated on global news.

D. Contango & Backwardation (Futures Risk)

  • When futures prices are higher (contango) or lower (backwardation) than spot prices.

  • Solution: Roll over contracts carefully.

5. How to Start Trading Commodities

Step 1: Choose a Trading Platform

  • Brokers: Interactive Brokers, TD Ameritrade, IG, Saxo Bank

  • Futures Trading: NinjaTrader, ThinkorSwim

  • CFDs/ETFs: eToro, Robinhood

Step 2: Learn Fundamental & Technical Analysis

  • Fundamental: Supply/demand, economic reports.

  • Technical: Charts, indicators (RSI, MACD).

Step 3: Start with a Demo Account

  • Practice risk-free before using real money.

Step 4: Develop a Trading Plan

  • Define entry/exit rules, risk tolerance, and goals.

Step 5: Monitor & Adjust

  • Keep a trading journal and refine strategies.

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