Oil Commodity Trading

GUIDE | TRADING BASICS | BEGINNER

Commodity Trading: What is it and how does it work?

Learn the essentials of commodity trading, including what commodities are, why they’re popular among traders, and how to achieve success.

A brief history of commodity trading

Popular examples include primary agricultural products, such as corn, soybeans or dairy products, energy products such as oil and natural gas, and metals such as gold, silver and aluminium. Trading takes place on international commodity market exchanges, like the New York Mercantile Exchange (NYME).

What are commodities?

What is Commodity trading?

It describes the purchasing or selling of commodities. Transactions fall into two categories:

Hard and Soft Commodities

In reality, the commodity market is not one marketplace. Rather, it’s various regulated futures exchanges. What happens in the exchange? Hedgers (commodity companies, retailers, or manufacturers) buy futures contracts created by the exchange. Their aim is to offset the risk associated with price changes. Speculators and traders look to buy low and sell high (or vice versa if going short).

In the past, most trading took place on the trading floor. Electronic trading now dominates. Examples of London commodity markets include the London Commodity Exchange (LCE) and London Metal Exchange (LME).

The most traded commodities, in order of popularity, include West Texas Intermediate (WTI) crude oil, coffee, natural gas, gold, Brent Oil, silver, sugar, corn, wheat, and cotton.

Commodities with the highest trading activity are the best commodities to trade as CFDs. They are highly volatile with high price swings. Various commodity markets include:

How to Trade Commodities

Physical Commodity Purchases

During the trading, buyers exchange physical commodities with sellers. Trading is based on spot prices. For example, an investor may visit a precious metal website such as JM Bullion. After buying gold bars, delivery takes place. Oil companies may also buy and store oil barrels to sell later.

Choose a trading platform
Trading commodities as CFDs is ideal for beginners.

Choose a commodity asset
The platform should offer various commodity trading instruments. Find a commodity characterised by high-liquidity and stability. On FXTM, traders will access Brent Oil, WTI Oil, and Natural Gas.

Learn more about the commodity
An expert commodity trader seeks more information about the commodities markets in play. They learn what drives price movements. New traders may also take advantage of a commodity trading advisor. It's a tool or service that generates trading signals.

Commodities Futures

Traders commonly use financial derivatives, such as CFDs, swaps, futures, forwards and options, to trade commodities. Derivatives take their value from the price of an underlying asset, such as oil. They enable traders to speculate on the price of a commodity, without having to take physical ownership or delivery of the asset.

Open trades
Before spending real money, start with a demo account. Go long or short for the particular commodity trading instrument. Refine your trading system and master fundamental or technical analysis techniques. Use real money after developing a profitable system.

Keep your eyes on your open positions
Watch open positions. Avoid early exits on profitable trades or delayed exits on unprofitable trades.

Trade commodities with an award-winning broker
Looking to start trading commodities? Buy and sell oil, natural gas, coffee and more as CFDs with FXTM.
Start trading

Trading Commodities with FXTM

With FXTM, you can trade energy commodities, including Brent crude oil, WTI crude oil, and natural gas, as well as precious metals such as gold and silver.

As you’re trading a CFD – a financial derivative – you don’t need to take ownership of the physical asset. You can simply speculate on whether the price of commodities will rise or fall, with opportunities to profit in both directions.

So, why trade commodities at FXTM?

  • Leverage: Traders may open larger positions using the multiplication effect of leverage. For US natural gas, the leverage is up to 1:19 or 1:52 with US crude oil
  • To diversify your portfolio
  • Access to popular commodity markets
  • Low margin requirements
  • Competitive spreads ranging from 4 to 11 pips

Popular commodities markets

You can trade energy CFD commodities on popular markets that include the below:

Undated Commodities Vs. Commodity Futures

Commodity contracts specify the terms of delivery. For example, in commodity futures trading, contracts have a set delivery date in the future. Upon the expiry date the contract simply no longer holds or exists. When a futures contract expires, you can’t trade it anymore.

For example, if you have a futures contract and it expires, the supplier is obligated to deliver the commodities. In the case of oil, the trader may receive a delivery notice, informing of the collection point of barrels of oil.

Most futures contracts are closed or sold before the expiry date. Traders mostly sell off the futures to realise a profit or roll over the contract.

Undated commodities are contracts without expiry dates. They can’t expire because they don’t involve direct ownership of real assets, for instance, trading commodity CFDs. Some companies that participate in commodity futures markets may see the contract through the expiry date if they want to take ownership of the underlying assets, for instance, manufacturers or wholesalers.

How Can I Improve My Commodity Trading Results?

Improve your commodity trading results by implementing these tips:

Get Educated

Looking for the best commodity finance education? We have several recommendations. First, try the CME Group education courses. They are behind the largest commodities futures markets.

Go to their main website, and from the menu, choose the "Education" tab. Besides courses and lessons, they have training simulators and various challenges. You can also follow different markets and obtain detailed explanations of global commodities.

Ice Markets is a reliable source of information on the global oil market. Catch their monthly oil reports and learn about the global oil benchmarks. They also publish informative articles and podcasts about the oil industry.
Investopedia gives detailed explanations of various terms and topics. Closer to home, FXTM also publishes webinars and expert insights.

Analyse the Commodity Market

For success in world commodity trading, build up your market analysis skills. First, take advantage of fundamental analysis. It may involve monitoring and gauging the impact of economic news releases. Traders use an economic calendar for this purpose. Watch the economic health of a country, key oil producers, and geopolitics. Read market reports from trading exchanges, including ICE or CME.

For instance, meetings and announcements by OPEC have an immediate effect on oil prices. Why? Members of the trade organisation collectively account for 40% of the world’s oil supply.

Develop your fundamental analysis skills, too. Analysing charts to spot price patterns or trends provides short-term trading signals. You can learn more about:

  • Momentum indicators
  • Moving averages
  • Scholastic indicators
  • Relative strength indicators
  • Bollinger bands
  • Moving average convergence divergence (MACD).

Manage your risk

Speculating on price movements involves risking your capital. Using leverage also multiplies your risk. For proper risk management, when you trade commodities:

Set up stop-loss orders: The S/L restricts your losses to an amount you're comfortable losing on a trade.

Trailing stops: The trailing stop is essentially a moving stop-loss order that trails or follows the price movement. Rather than specifying a specific limit price, you place the trailing stop several points from the current price.

Risk vs reward ratio: It's the amount you stand to gain for each unit of currency invested. For instance, a ratio of 1:2 signifies that you might gain $2 for risking $1, or 10 pips for risking 5 pips. An ideal ratio is 1:3.

Diversify Your Portfolio with Commodities

If you're currently trading forex pairs, should you add commodities to your portfolio? What advantages does this commodity trading strategy bring?

Trading commodities with currency pairs may reveal a correlation in the prices. It's widely known, for instance, that the price of oil is inversely correlated to the US dollar. An increase in oil prices up to 10% may lead to a depreciation of the US dollar. A weakening US dollar may cause an increase in oil prices.

Certain currencies around the world are chosen as "commodity currencies." Fluctuating commodity prices and export values influence price movements of the currencies.

Retail traders looking to sell or buy commodities as CFDs will also appreciate that commodities are more volatile than currency pairs and stocks. They can greatly profit by making correct price predictions.

Use these rules to find the best commodities broker:

Many online commodity brokers allow traders access to commodities markets via CFD trading. But make sure that they have the right regulatory compliance. Check their safeguards that guarantee the safety of your funds

Brokers may be dealing or non-dealing brokers/ECN brokers. A non-dealing broker doesn't take opposing positions against you. In some sense, it eliminates competition. ECN accounts are also the most favourable if you're using Expert Advisors/Trading algorithms.

Make sure that you're paying a fair market rate. For ECN broker accounts, traders pay spreads and commission. For standard accounts, you only pay for spreads.

Choose a broker that provides access to the key commodities, including natural gas and crude oil.

The best brokers should provide additional resources and value. Check out if they publish educational videos, articles, webinars, or market analysis.

What commodities can I trade with FXTM?

With FXTM, you can trade the most popular commodity markets on the planet, including precious metals, oil, gas, and a range of soft commodities.

There are a couple of ways you can trade commodities with FXTM:

  • Spot metals against major currencies e.g., XAUUSD (Gold/US Dollar).
  • CFDs on commodities e.g., UK Brent oil, US crude oil, and US natural gas.

Here's the full list of the CFD commodities you can trade today:

  • UK Brent oil
  • US crude oil
  • US natural gas
  • Cocoa beans
  • Arabica coffee
  • Robusta coffee
  • Copper
  • Corn
  • Cotton
  • Soybeans
  • Sugar
  • US heating oil
  • Wheat

FAQs

The margin refers to the amount of money that should be in your trading account balance to open positions on various commodities. Margin rates differ from broker to broker. FXTM offers a leverage of up to 1:200 on spot metals with a floating margin of up to 0.5%.

The most profitable commodities are characterised by high liquidity and volatility. So, the best commodities to invest in or trade include natural gas, crude oil, and spot metals.