Commodity trading explained: Learn how to trade with CFDs

Katerina Parpa

Trading Journalist

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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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In this guide:

  1. What is commodity trading?
  2. Understanding the commodity market
  3. How to trade commodities with CFDs
  4. Strategies for CFD commodities trading 
  5. Top indicators for commodities trading
  6. Diversifying your portfolio
  7. Advantages and risks of CFD commodity trading
  8. Start commodities trading with Exness

If you’ve been asking what is commodity trading and how to buy commodities, you're about to enter the dynamic world of commodities markets—a place where natural resources, among other things, are traded every day. This guide serves as your gateway to understanding not only how this particular market operates but also how you can participate in it by trading them through CFDs (contracts for difference). We discuss the details of how to trade specific commodities, as well as how to diversify your trading portfolio with various commodities. We explore the distinct advantages and potential risks that come with trading metals and other commodities and practical steps for how to start trading precious metals and other commodities.

What is commodity trading?

The trading of commodities is a dynamic aspect of the financial markets that involves the buying and selling of raw materials. As the foundational elements of global trade and industrial activity, commodities such as oil, gold, and silver play a crucial role in economic transactions. Traders engage in trading this market to capitalize on price fluctuations driven by changes in supply and demand. By predicting whether the prices of these essential goods will rise or fall, traders can potentially profit either by buying or selling. 

What are commodities?

At its core, a commodity is a basic good used in commerce that is interchangeable with other goods of the same type. The attributes of commodities ensure that, regardless of who produces them, their quality and characteristics remain consistent. This standardization and interchangeability of commodities have led to the establishment of specialized commodity exchanges, where these goods are traded in a regulated and standardized environment. These exchanges facilitate the efficient buying and selling of commodities, allowing traders and investors to engage in transactions with confidence in the product's uniformity and quality. 

At Exness we provide access to trade commodities such as precious metals, oil and gas.

Commodities trading with CFDs (contracts for difference) offers a different experience compared to the traditional buying and selling of commodities through a commodities exchange.

Commodities trading with CFDs

CFDs are financial derivatives that allow traders to speculate on the price movement of commodities without actually owning the physical commodities. When you invest in commodities using CFDs, you are agreeing to exchange the difference in the price of a commodity from the time the contract is opened to when it is closed.

Key differences from traditional trading

Leverage: CFD trading often involves leverage, meaning traders can open a large position with a relatively small amount of capital. This has the potential to amplify profits but also magnifies potential losses.

Ownership: With CFDs, you never own the actual commodity. You’re merely speculating on price changes, so there are no concerns about storage or transportation.

Selling: CFDs make it easy to sell, allowing traders to potentially profit from falling prices, which is more complicated with traditional trading that involves futures and deliverable commodities.

Access to global markets: CFD traders can access a wide range of global markets from a single platform, often beyond what a traditional commodity exchange offers.

Costs and fees: Trading CFDs may involve different cost structures, including spreads, overnight holding fees (swap rates), and commission fees, which differ from the costs associated with traditional futures trading.

Trading hours: CFD markets often offer extended hours compared to traditional commodity exchanges, allowing traders to react to market-moving events as they happen.

Regulation: The regulation of CFDs varies significantly from one region to another, and in some jurisdictions, CFD trading may not be permitted.

It’s essential to understand both the benefits and disadvantages of CFD trading and its various nuances.

What types of commodities can be traded?

This type of market is vast and diverse, encompassing a wide range of goods that fall into four primary categories: metals, energy, livestock and meat, and agricultural products. At Exness we offer our traders the opportunity to trade CFDs two of the most widely traded commodity categories: metals and energies.

Trading metals

In the metals category, commodities such as gold, silver, platinum, and copper are traded. Traders are often drawn to precious metals, especially gold, during times of market instability or economic downturns due to their longstanding value and reputation as a safe-haven asset. Metals also serve as a hedge against inflation and currency devaluation, making them a significant part of trading this market.

Trading energies

Energy commodities include essentials like crude oil, heating oil, natural gas, and gasoline. The energy sector is particularly sensitive to global economic changes and production shifts. For instance, a decrease in oil production can lead to increased prices as demand remains steady or grows. Trading in energy commodities is, therefore, influenced by a myriad of factors, from geopolitical events to advancements in alternative energy sources for oil and gas.

Understanding the commodity market

The commodity market is a platform where raw materials, physical assets and physical goods, or primary goods are exchanged. These commodities can include anything from agricultural products like wheat and cotton to energy resources such as oil and natural gas, and metals like gold and silver. Understanding how the commodity market works involves grasping the interaction of supply and demand, as well as various other factors that can influence prices and market dynamics. Businesses and investors participate in the live market to hedge against potential price fluctuations, speculate for profits, or ensure a steady supply of materials.

What factors move the commodity market?

Several key elements can cause this market to move. Supply and demand are fundamental: a shortage in supply can drive up prices, while an excess can push them down. Geopolitical issues, economic stability, and government policies can lead to sudden shifts in availability and cost. Moreover, the health of the global economy and technological changes can cause long-term trends in commodity demands. Market speculation and factors such as weather, storage, and transportation costs also play a significant role in the daily fluctuation of commodity prices.

What factors influence commodity prices?

The prices of commodities are influenced by a combination of factors. The cost of producing and bringing a commodity to market, such as storage and insurance, can affect its price. Currency fluctuations are important too, as commodities are often traded in U.S. dollars. Geopolitical events can disrupt supply chains, while global economic conditions can change demand levels. Inflation and interest rates have their say as well, often making commodities a hedge against the rising cost of living. Technological advancements can either decrease production costs or increase demand for new types of commodities, while weather and environmental factors can impact agricultural and energy supplies significantly.

Commodity trading hours

Commodity trading hours vary depending on the market and the commodity being traded. For most commodities, trading occurs during the business hours of the producer's time zone. For example, agricultural commodities are often traded when the corresponding markets are open in the U.S. or Europe. However, due to the global nature of the markets, some commodities can be traded almost around the clock in different exchanges all over the world. It's essential for traders to be aware of the specific trading hours to effectively participate in this type of trading.

All trading hours for commodities featured on our website are in server time (GMT+0).

How to trade commodities with CFDs

Trading metal and other commodities using contracts for difference (CFDs) can provide traders with the opportunity to speculate on price movements of a particular commodity without owning the actual physical commodity. CFDs are derivative financial instruments that allow you to potentially profit from both rising and falling market prices. However, it's crucial to understand that CFD trading is complex and carries a high level of risk. It is not suitable for everyone, and you should only trade with money you can afford to lose. Below is a step-by-step guide that can help you start trading commodities with CFDs:

11 steps to start commodities trading with CFDs

Step 1: Understand CFDs and how they work

Before you begin trading, educate yourself about what CFDs are and the risks involved. CFDs are leveraged products, meaning you only need to deposit a small percentage of the total trade value, which can result in both amplified profits and losses.

Step 2: Choose a reputable CFD broker

Research and select a reputable CFD broker. Consider factors such as regulation, trading platform features, available commodities, spreads, leverage options, customer service, and security and protection measures.

Step 3: Open a trading account

Register for a trading account with your chosen broker. This typically involves providing personal information, proof of identity, and proof of residence to comply with financial regulations.

Step 4: Fund your account

Deposit funds into your trading account. Check the broker's accepted payment methods and ensure you deposit enough to meet margin requirements for the commodities you wish to trade.

Step 5: Practice with a demo trading account

Consider practicing with a demo trading account before trading with real money. This allows you to familiarize yourself with the trading platform and test your trading strategies without any financial risk.

Step 6: Research the market

Conduct thorough research to understand the commodities market. Learn about factors that influence commodity prices, such as supply and demand dynamics, geopolitical events, and economic indicators.

Step 7: Develop a trading plan

Create a trading plan that outlines your investment goals, risk tolerance, trading strategies, and criteria for entering and exiting trades. Stick to your plan to manage risky investments effectively.

Step 8: Analyze the markets

Use technical and fundamental analysis to evaluate commodity markets. Technical analysis involves analyzing price charts, while fundamental analysis focuses on external events and data.

Step 9: Choose which commodity to trade

Select the commodity you want to trade based on your market analysis and personal preferences. Popular commodities for CFD trading include oil, gold, and agricultural products, and at Exness we offer the option to trade energies and metals with CFDs.

Step 10: Place a trade

Once you've chosen a commodity, place your trade. Decide whether to buy if you think the commodity's price will rise or sell if you believe the price will fall. Set your trade size, leverage, stop loss and take profit.

Step 11: Monitor and close your position

Regularly monitor your open positions and the markets. Be prepared to act if the market moves against you or to take profits when your trading objectives are met. Close your position when you're ready.

Strategies for CFD commodities trading 

When it comes to commodity market trading, traders are constantly seeking effective strategies to navigate the fluctuations of assets such as metals and energies. Commodities like oil, gold, and silver play a significant role in global economics, and understanding how to trade these commodities requires substantial investment in time and resources. Below are some strategies that traders can employ to make informed decisions in commodity markets, including when and how to trade gold, silver, and oil.

Trend trading

Trend trading involves following the direction of the market, whether it's up or down. Traders using this strategy for crude oil investing might look at crude oil indices to determine ongoing trends and enter trades that align with the direction of those trends.

To learn more about trend trading metals and other commodities, click here.

News trading

Fundamental traders, otherwise known as news traders, analyze economic events and news that can affect commodity prices. For example, an increase in oil demand could lead traders to buy, anticipating a rise in market prices. When trading metals such as gold, understanding how gold trading works involves monitoring geopolitical events that often influence gold prices.

Range trading

This strategy focuses on identifying the support and resistance levels within which the price of a commodity fluctuates. For instance, traders figuring out how to trade crude oil will buy at the support level and sell at the resistance level, capitalizing on the commodity's price movement within a stable range.

Position trading

Position trading is a long-term strategy where traders hold onto commodities for extended periods. This approach is less concerned with short-term fluctuations and more focused on the long-term fundamental trends affecting commodities like energies and metals.

Breakout trading

When a commodity's price exceeds resistance or drops below support levels, breakout traders take positions. This could be highly relevant, for example, when gold is traded during periods of economic uncertainty, where a breakout might signal a significant price movement.

Seasonal trading

Commodities often exhibit seasonal patterns, which traders can exploit. Seasonal trading takes advantage of these patterns, such as increased energy demand in winter or agricultural cycles for crops.

Trading a single commodity

Focusing on a single commodity, such as gold, allows traders to deeply understand and monitor its market movements. Knowing how to trade gold effectively means keeping a close eye on factors specifically affecting the gold market.

Top indicators for commodities trading

Using the right technical indicators is essential for success in navigating the commodity markets, for example when figuring out how to trade gold or other precious metals. These indicators not only help in predicting price movements but also in making informed decisions. Below is an overview of the top indicators that traders rely on in the market.

Stochastic oscillator

The stochastic oscillator is a momentum indicator that compares the closing price of a commodity to its price range over a specified period. Its two lines, %K and %D, provide signals when they cross each other. A buy signal is indicated by the %K line crossing above the %D line, while a sell signal is suggested when the %K line crosses below the %D line. Divergence and the shape of the oscillator's peaks and troughs can also offer insight into market strength and potential reversals.

To learn more about using the stochastic oscillator for commodities trading, click here.

Bollinger Bands

Bollinger Bands are vital for traders to assess market volatility and overbought or oversold conditions. These bands consist of a trend-centered middle line with an upper and lower line representing resistance and support levels, respectively. The bands widen with increasing price volatility and contract when the market is stable. This indicator is particularly useful in identifying the intensity of price movements and potential breakouts.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) helps traders identify overbought or oversold conditions by measuring the magnitude of recent price changes. It scales from 0 to 100, with levels above 70 indicating overbought conditions and levels below 30 suggesting an oversold market. Apart from these thresholds, traders look for divergence and failure swings within the RSI to predict potential reversals. However, the effectiveness of RSI divergences can be affected by the prevailing market trend.

Moving averages

Moving averages smooth out price data to help traders identify trends in commodities. By calculating the average price over a set period, traders can determine if they should enter or exit a trade. For example, when considering how to trade gold or how to trade silver, a moving average might indicate the ongoing trend's strength and whether it's an opportune time to buy or sell.

Learn more about using moving averages for commodities trading here.

Moving Average Convergence Divergence (MACD)

MACD is a trend-following momentum indicator showing the relationship between two moving averages of a commodity's price. The subtraction of the 26-day EMA from the 12-day EMA forms the MACD line, while the signal line is typically the 9-day EMA of the MACD. When the MACD crosses above the signal line, it suggests a bullish trend, and a crossover below indicates a bearish trend. The histogram provides a visual representation of the divergence between the MACD and its signal line.

Diversifying your portfolio

Incorporating commodities into your trading portfolio is a strategic approach to diversification, mitigating risk by spreading positions across different instruments.

Metals, such as gold and silver, often hold their value during times of high volatility. This means that if other trades, like stocks, are having a rough time, your metal trades might still be stable. On the other hand, oil prices can be very volatile which can be potentially profitable if you are able to correctly foresee the direction the market might take and make a move. By diversifying your portfolio and trading both metals and oil, you're not putting all your eggs in one basket, which can help you manage risk and protect your capital.

At Exness we offer the most popular and widely traded commodities in the categories of metals and energies.

Advantages and risks of CFD commodity trading

From oil investing to trading gold and silver, the commodities market presents unique advantages along with its own set of risks. Understanding both the benefits and potential pitfalls is important for traders who want to navigate this market. In this section, we will delve into the key advantages that attract investors to invest in commodities, as well as the risks that must be managed.

Advantages of commodity trading

  • Diversification: Trading metals and other commodities can help investors diversify their portfolios, potentially reducing overall portfolio risk.
  • Hedge against inflation: Commodities often serve as an effective hedge against inflation, as their rising prices are usually affected when the cost of living rises.
  • Speculation opportunities: The commodities market offers opportunities for speculation, as traders can leverage market forecasts and trends to potentially reap profits.
  • Transparency in pricing: Commodity prices are influenced by the global market supply and industrial demand, leading to a level of pricing transparency that can be beneficial for traders monitoring market movements.
  • High liquidity and volume: When you invest in commodities such as oil, a vital energy commodity, allows traders to tap into a market with high liquidity and volume, presenting numerous trading opportunities.
  • Leverage: Many commodity brokers offer the possibility of trading on margin, which provides traders with leverage, amplifying both potential gains and losses.

Risks of commodity trading

  • Market volatility: Some commodities can be highly volatile, influenced by unpredictable factors such as weather, political instability, and natural disasters, which can lead to significant price swings.
  • Leverage risks: While leverage can amplify gains, it also increases the potential for substantial losses, which can exceed the initial investment in some cases.
  • Complexity: Commodities trading can be complex, with numerous factors affecting prices, requiring substantial expertise to navigate effectively.
  • Regulatory risks: Changes in government policies and regulations can have a profound effect on commodity prices and trading strategies.
  • Liquidity concerns: Some commodities may face periods of low liquidity, making it difficult to enter or exit positions without affecting the market price.
  • Geopolitical tensions and policies: The oil market, while offering significant opportunities, is also subject to geopolitical tensions and shifts in energy policies, which can lead to abrupt price changes by oil companies.

Frequently asked questions

Hard commodities, such as gold, oil, or iron ore, are natural resources that must be mined or extracted. Soft commodities, on the other hand, are agricultural products or livestock, like wheat, coffee, cattle, or sugar. The main difference lies in their nature; hard commodities generally have a longer shelf life and are often used as inputs in the production of other goods, while soft commodities are typically perishable and are directly consumable.

To trade gold and silver as a beginner, be sure to apply these five steps:

  1. Educate yourself: Learn the basics of the precious metals market, including what drives price changes and how gold and silver are traded (e.g., physical bullion, ETFs, futures).
  2. Set a budget: Determine how much you can afford to invest in commodities without risking your financial stability. Never invest in commodities with money you can't afford to lose.
  3. Choose a platform: Pick a reputable trading platform or broker that offers access to the gold and silver markets. Ensure they are regulated and have good customer reviews.
  4. Start small: Begin with a modest investment to get a feel for the market dynamics. This minimizes potential losses as you gain experience.
  5. Monitor and learn: Regularly check the markets and stay informed about economic news that may influence precious metal prices. Learn from your trades and adjust your strategies accordingly.

To trade oil as a beginner, follow these five steps: 

  1. Educate yourself: Learn the basics of how to trade crude oil by researching market dynamics and factors affecting oil prices, such as economic indicators, supply and demand, and geopolitical events. 
  2. Choose a broker and platform: Choose a trading platform and open a brokerage account with a reputable provider. 
  3. Practice with a simulator: Start with practice trades using a demo trading account to build confidence. 
  4. Plan and strategize: Develop a trading strategy based on technical analysis, fundamental analysis, or a combination of both. 
  5. Start small:  begin trading with small amounts and monitor the market continuously, as energy prices of commodities like oil can be more volatile than metals trading.

When it comes to how to trade gold and silver, understand that while how gold trading works, as well as silver, involves similar principles of supply and demand, trading energies may be more sensitive to political and economic news, whereas gold and silver often serve as havens during market turbulence.

Traders looking to apply the most optimal strategy for this type of trading often implement a holistic approach, a commitment to ongoing education, and a readiness to pivot with market fluctuations, while combining different trading methods that align with their risk appetite, investment timeframe, and insights from market analysis to construct a tailored strategy.

To be good at trading this market, handle leverage with care, as high leverage can lead to large profits or magnify losses. Understand and monitor the market cycle, recognizing how demand and supply influence commodity prices. Embrace volatility by starting with less volatile commodities and choosing lot sizes based on volatility, not just available margin. Lastly, choose a reliable and efficient broker with low fees and robust trading platforms to maximize your trading experience and profits.

Trading commodity futures on futures markets often involves the Commodity Futures Trading Commission (CFTC) as a regulatory body to ensure the integrity of the market. A futures contract, overseen by this entity, is a legal agreement to buy or sell a commodity at a predetermined price at a specified time in the future. Each commodity futures contract specifies the quantity of the commodity and the delivery date. Unlike CFDs, which offer more flexibility and don't expire, commodity futures have a set expiration date, making them less flexible.

A major distinction is that a futures contract is traded on a futures exchange and comes with a definite future delivery end date, obligating the parties to settle on that date. In contrast, CFDs (contracts for difference) have no set expiration and you never take ownership of the actual commodity. This essential difference highlights that while both instruments allow for speculation in commodity prices, they function differently in terms of trade duration and the nature of the commitment. In addition, CFDs have a wider range of options for trading with leverage.

Start commodities trading with Exness

Entering this arena requires a thorough understanding of the nuances between traditional trading of commodities and commodity CFD trading. With Exness, you can navigate these waters with confidence. Our platform allows traders to explore how to trade oil, how to trade gold and silver, and other metals through CFDs and the flexibility and opportunities for both buying and selling. However, it's important to recognize that while trading with high leverage can amplify profits, it also increases any losses you make. Traders must evaluate their risk tolerance against the backdrop of Exness's robust regulatory framework, which ensures a higher standard of financial security and client protection.

With a 15-year track record of reliability, Exness offers traders the peace of mind they require in their chosen trading platform and market conditions. If you’re just starting out, test out our risk-free demo trading account before moving to a live account. When you’re ready to put some skin in it, explore the options of Standard and Professional accounts and take advantage of our 24/7 customer support. 

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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.