How to start trading Commodities online and make profit? Table of Contents

How to start trading Commodities online?

Commodity trading from basic concepts to practical advice, in an article that explains how to take your first steps in the oldest market in history.

For thousands of years, traders have ventured across seas, oceans, and continents only to be able to transport their goods to every corner of the known world.

Today it only takes a few clicks to become a commodities trader, and the modern market offers more and more financial derivatives that allow you to invest without having to physically buy or sell the assets in question.

The result? More and more investors are approaching this huge market to diversify their trading portfolio, protect their revenues from inflation and take advantage of the high volatility that characterizes commodities.

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What is a Commodity?

When we talk about commodities we are talking about commodities in general, that is any type of good that is exchanged to satisfy a need, regardless of its qualitative differences.

For this reason, these goods are defined as fungible, because they can be substituted for the purpose of providing a service or a need.

In fact, the term commodity derives from the French commoditè, meaning advantage or convenience.

If this definition seems difficult, try to think of nutrition as a need, and meat as a product capable of satisfying it.

Well, you will immediately realize that to feed yourself you could buy meat, but you could equally replace it with fish, milk, eggs, or any other food that has the same function.

And this is exactly what happens for commodities: depending on the demand, supply, and price of raw materials, consumers are always ready to replace one good with another that performs the same function.

As you will discover, this concept, defined in economics elasticity, is very important for understanding the trend of raw materials.

Just think of the technological push towards substitutes for petrol starting from its constant price increases: in the short term, motorists will suffer the increase, but over time they will begin to consider whether to buy an LPG, methane, or hybrid car.

This implies that the two markets are somehow connected to each other, and this type of relations, more or less direct, exist for almost all commodities.

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Types of Commodities

Now that we understand what a commodity is, let’s see the two macro-categories in which they are generally divided, namely soft commodities and hard commodities.

Soft commodities include all agricultural and livestock products, and can therefore be divided into:

Agricultural goods
Wheat and cereals, corn, soybeans, vegetable oils, cocoa, coffee, sugar, timber, tobacco, fruit and vegetables and their derivatives, cotton and other vegetable textile fibers, hemp, etc.
Livestock and animal derivatives
Cattle, poultry, meat, milk, eggs and so on.

Hard commodities, on the other hand, are mostly products of mining or natural resources and include:

Precious metals
Gold, platinum, silver and palladium.
Industrial metals
Copper, aluminum, steel, nickel and many others.
Energy sources
Crude oil, natural gas, petrol, fuel oils and similar products.

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How to start investing in Commodities online?

If you are approaching the commodities market, I have good news for you: you won’t have to worry about making room in the cellar for a hundred barrels of crude oil or a herd of cattle.

In fact, if in the past investors accessed this market only to exchange physical goods, today this is no longer the case, and in order to allow everyone to participate in the trade, financial derivatives were born over time Purchase a raw material when the price is convenient, store it and then resell it when the market offers good opportunities: the good old traditional methods still exist, but remain out of reach for most retail investors.

Commodity trading takes place today mainly through many financial products, and together we will discover the most important, namely spot and futures, CFDs, and ETCs.

There is also the option to trade commodities through options, and AvaTrade has devoted a lot of space to this versatile tool in their article on options trading.

You will find a lot of material on CFDs and futures in our training material, so in this article, we will only talk about their applications in the commodities market.

If you are interested in finding out what they are and how they work, also read our article on futures and CFDs.

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What are differences between Spot and Futures?

Spot or rolling daily, contracts depend on the daily price of the asset at the time of the contract.

These intraday contracts are better suited for short-term trading, as they expire at the end of each trading day and must be “extended” daily through an operation known as rollover unless the trader decides to close them earlier.

You can consult the expiration dates of the related contracts available for trading and the related rollover dates.

Now let’s move on to futures, which are much more important for retail investors.

A future is a particular type of forwarding contract that involves an agreement between two parties to exchange an asset, in this case, a commodity, at a certain price on an agreed date.

This can range from a few days to weeks to several months, depending on the asset in question.

They arise from the producers’ need to protect their investments from market fluctuations and then spread until they won a place of honor among the most popular contracts.

Futures in fact provide that the contract can be exchanged both in exchange for the physical asset and for cash, creating two different strategies: hedging or speculation.

It will be clear after a simple example.

A farmer who sows today has made a considerable initial investment and is not sure how much he will be able to reap, or what price he will get for his goods.

He then opens a futures contract in which he pays his right to sell his product at a certain price on a certain date.

He has thus covered his initial investment.

Speculators, on the other hand, like traders, are not interested in selling or buying physical assets, and they buy futures contracts in order to resell them at higher prices.

Their purpose is to profit from their forecasts on market trends.

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What is Commodity CFD trading?

A contract for difference is an over-the-counter (OTC) financial product that allows you to benefit from the price fluctuations of various assets, in this case, raw materials, without actually taking possession of the asset in question.

When we buy a CFD, we are not buying the physical asset, but only the right to receive compensation for our predictions if they are correct.

The advantages of trading commodities with CFDs are many and easy to understand:

No physical property on the underlying
No taxes and commissions, but also no storage and maintenance or transport of goods.
Financial leverage
If you learn to master it, it allows you to move large capital with relatively small investments.
Simplicity and speed of execution
You can complete multiple transactions in the same day.
Long vs short versatility
They allow you to benefit from both price rises and falls.
Hedging
Some commodities are inversely correlated, and allow for hedging strategies.
Wide range of assets
Negotiate what you know best.

Trading CFDs is not for everyone, do it with a reliable and award-winning broker.

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What is ETC (Exchange-traded Commodities)?

Exchange-traded Commodities are extremely similar to ETFs but specific to the commodity market.

Financial instruments negotiable on the stock exchange can be defined that replicate the returns of the commodity or index to which they refer.

These are passively managed tools, and if you want to learn more about how they work I recommend you read our article on what an ETF is.

In particular, we will focus on its uniqueness compared to an ETF:

  • The return of an ETC may depend on both the spot price and the future price of a single commodity or a basket of commodities;
  • They require very low capital and tend to faithfully follow their underlying;
  • Make it possible to invest not only in indices but also in individual commodities.

Find out more about ETC (Exchange-traded Commodities)

How does Commodity CFD Trading work on AvaTrade?

We have seen how commodities trading can be a valid way to diversify your trading portfolio, a source of income, a means of hedging.

In addition, it contains a unique charm, because it intrinsically transmits passion for the good that is negotiated.

AvaTrade brings this world to your home, to your computer or mobile device, allowing you to trade the most popular commodities wherever you are.

To get started, all you have to do is open a trading account, or use the one you already use for your favorite assets.

As always, we recommend that you always try your strategies on a demo account, and only when you feel ready to switch to a real one.

AvaTrade offers special advantages for commodity trading:

  • Lots of commodities to choose from, one trading account;
  • Do you prefer MetaTrader4, MetaTrader5 or AvaTradeGO mobile?;
  • Multilingual customer service 24 hours a day, 5 days a week;
  • Attractive conditions and competitive spreads;
  • Regulated broker.

AvaTrade works worldwide is regulated by 6 supervisory bodies and compliant with the European MiFID II regulation.

In Italy, it operates under the passport regime of its license n. C53877 issued by the Central Bank of Ireland.

AvaTrade’s commitment to always gives you the best has been awarded numerous worldwide awards to date.

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Some advice before trading Commodity CFDs

If you feel ready to take your first steps in commodity trading, take advantage of these simple tips:

  • Devote time and effort to carefully study the asset you want to trade, try to understand what influences demand, supply and trend. A good trading calendar will be a valuable tool for you.
  • If you don’t already have a trading account, carefully choose a broker who inspires you with confidence and offers you everything you may need.
  • Establish a separate budget to devote to trading, you will protect yourself from possible difficulties.
  • Never risk more than you are willing to lose: a wise strategy is to start from the risk you can take, and based on that decide how much to invest.
  • Decide on a trading plan and follow it strictly, it will protect you if the market puts a strain on your emotions.
  • Never stop aiming higher, and broaden your knowledge as much as possible.

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What are the best Commodities to trade online?

The most popular among traders are gold and oil.

This is because they both enjoy excellent liquidity and sources of information.

However, they are not necessarily the best commodities to trade.

The best commodity for any trader is the one in which you are most competent.

One in which you have detailed knowledge of the market, or of the supply and demand for that particular product.

Only deep knowledge makes it easier to successfully trade a commodity. And anyone can get it through research and study.

The traditional way of trading commodities is to use futures contracts.

However, this is not always the best way to trade commodities.

First, many traders do not have access to futures, because this trading requires a rather large initial investment.

Futures are also affected by leverage, and while this can inflate gains, it can also amplify losses.

All these problems can be avoided by using CFDs instead.

Liquidity is never an issue with CFDs, you can start with a few hundred dollars and have the option to decide whether or not to use leverage.

Many people when thinking of commodity trading rethink the image of the “trading pit”, such as the one seen in the movie “A Chair for Two”, where Eddie Murphy and Dan Aykroyd close the orange juice futures market.

This may have been the case in the past, but in the 21st century, it has become virtual and can be managed online from any corner of the globe.

All you need is to open a trading account with a broker who offers access to commodity markets and anyone can be able to trade online.

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