Commodity Trading Basics

Apparently, commodity trading has been around for thousands of years.  Shortages of commodities have started wars, and caused the downfall of governments.  History can contribute to understanding of commodity trading.  All of the same commodities that are traded in the modern markets have been traded throughout history.  Empires were built on their ability to buy and sell commodities.

There are four main categories of Commodity trading.

  • Energy (including crude oil, heating oil, natural gas and gasoline)
  • Metals (including gold, silver, platinum and copper)
  • Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)
  • Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton)

Commodity trading in exchanges is regulated to protect the buyer because in today’s international markets it is not possible to inspect what you purchase.  Technological growth, global development and new market demands have accounted for huge changes in the commodities markets.  Investing in commodities is often a way for investors who have lost money in the stock market to improve their situations.

Like any other market, it is imperative that you understand the market and how it moves before you begin investing.  In addition, it is important to have a trading plan and a strategy that has been back tested and researched.  Having a clear and logical plan is the key to financially succeeding in any market trading and commodities is no exception.  Obviously, your trading plan will evolve over time and there will be some trial and error involved.  The goal is to minimize the need for this by following some basic rules.

First you must choose what commodity or commodities you want to trade. There are 30 actively traded commodities on the US futures exchange.  It is a good idea for a beginner to start with some type of knowledge of the industry in which they choose to get involved.  This will give you a better understanding of the market and what are the factors that will affect the prices.  The other important determining factor to help decide which commodity to trade is the risk factor.

Some commodity prices move faster than others.  That means some commodities will move small amounts per day and some can move by thousands of dollars in the span of 24 hours.  Futures exchanges require a minimum deposit for each future contract a trader will open.  Based on the size of this Futures Margin, you can determine the level of volatility of that commodity.

If you choose a small number of commodities to trade, you will be able to become much more familiar with that specific market, what causes it to move and what the trends are.  Most professional commodities traders concentrate on a couple of markets for that reason. Watching the commodities market will also give your insight into the direction and the movement so that you can make better decisions about your specific trades.

Once you determine which commodities are best for you, you can determine how and how much to be involved in the markets.