What is commodities trading?

Commodities trading is speculating on the price of commodities such as frozen concentraded orange juice, soybeans, gold or Oil.

What are commodities?

Commodities then are raw ingredients, the basic building blocks of our modern way of life, they help to feed and clothe us and provide us with energy, shelter and transportation.

“A raw material or primary agricultural product that can be bought and sold, such as copper or coffee” and “A useful or valuable thing”

When we talk about something being commoditised we mean that it is freely available or ubiquitous and though that’s true of some commodities, such as milk or salt, there are other commodities are really quite scarce indeed, and they undertake quite a journey to reach the end consumer.

That brings us to another interesting facet of many commodities they are consumables that are eaten or consumed in a manufacturing or chemical process, often on a single-use basis.

Many commodities have a finite supply and our continued use of these diminishes that supply, which will in some cases eventually run out. Unsurprisingly then commodity prices are often driven by concerns around their supply and demand, their markets are often cyclical in nature and subject to factors such as the weather and climate, which makes them of great interest to traders around the world.

Where can you trade commodities?

To trade commodities you need a commodities trading platform. The most common way to trade commodities is:

  • Commodities futures trading
  • Commodity CFDs (contracts for different)
  • Commodities ETFs (exchange-traded funds)
  • Commodities options trading

Compare commodities brokers for trading commodities in our comparison table

What are the best commodities to trade?

That’s quite a complex question but then I suppose it’s fitting that it should be because the commodity markets themselves can appear complicated to the uninitiated. Unlike stocks and shares or FX, many commodities trade in more than one form. For example, there are a large number of varieties of coffee and crude oil and they are all traded somewhere around the world.

For our purposes, however, we will concern ourselves with those commodities that are exchange-traded in standardised contracts or lots, as futures. Futures are a type of forward contract that allows traders to speculate on the price of an instrument or commodity out to a known point in the future. They can also be used by consumers and producers to fix their prices or hedge their costs, through the sale and purchase of say, sugar or heating oil, for the next year or two.

One place to start, when trying to decide what the best commodities to trade are, is liquidity. After all, the ability to enter and exit out of trade cleanly is a crucial component of successful trading or investing. The table below is a snapshot of the ten most actively traded commodity futures in early September 2019. As we can see there are a wide variety of commodity types in the table with entrants from energy, metals, and grains.

US crude oil and gold were the most actively traded commodities, however, it’s notable that there were also three food-related commodities in the table alongside the precious metals and energies.

Here is how to trade commodities if you want a strategy to get started.

Contract NameLast PricePrev Vol in Lots Traded
Crude Oil WTI (Oct ’19)54.36679,847
Gold (Dec ’19)1,540.10320,657
Corn (Dec ’19)368-6149,585
Crude Oil WTI (Nov ’19)54.13119,652
Natural Gas (Oct ’19)2.321116,584
Silver (Dec ’19)18.615112,887
Crude Oil WTI (Dec ’19)53.79104,804
Wheat (Dec ’19)460-485,252
Soybean (Nov ’19)866-681,645
Gasoline RBOB (Oct ’19)1.476567,838

Source Barchart.com

Gold and crude oil have coincidentally both performed well over 2019 to date as we can see in the chart below. At the time of writing gold (in green) was up just under +20% year to date whilst US Crude or WTI was higher by +20.6%.

Crude Versus Gold Chart

Source Investors Intelligence

Gold and crude oil often act as gauges of geopolitical and economic tensions.

Gold has continued to make gains, due to these concerns. Crude oil, however, sold off from recent peaks, over summer 2019, on worries about global growth and demand.

Are major commodities best for commodities trading?

I think the answer to this for most traders, and particularly those that are new to space will be an emphatic yes. Commodity markets can be full of idiosyncrasies and the more specialised you get the less obvious these maybe. With that in mind, even experienced traders will stick to those commodities that are highly tradeable or liquid, and which tend to trend.

Metals such as gold, silver and copper, alongside, the soft commodities of coffee, cocoa and sugar, as well as crude oil and natural gas are among the most consistently traded commodity contracts.

That said it’s worth bearing in mind that all commodity markets can be prone to gaping.

That is a sharp price movement in either direction, that takes a price out of the range seen during the previous session or period.

That can be beneficial if the gap acts in your favour i.e. it the price moves in the direction of your trade, but it can be equally painful if the gap moves the price sharply against you.

The chart below is of rough rice (a lesser traded commodity) and we highlight four separate gaps in its price action during the six-month lifetime of the chart.

Rough Rice Chart

Source Investors Intelligence

The best commodities for trading

As we have noted already liquidity is an important consideration when deciding which commodities, we should trade. We should also think about factors that can influence commodity prices. These range from weather reports to the strength of the US dollar in which the vast majority of commodities are priced, and traded in. A stronger US dollar tends to depress commodity prices, while a weaker dollar can often provide a boost to the commodity markets.

The relationship with the dollar could be considered as the beta of the commodity markets that is the anticipated move that commodities should undergo, relative to a change in the value of a benchmark or index, in this case, the US dollar.

As well as the beta or market-related return we can look for alpha that is the return produced by an instrument, that is unrelated to a benchmark or index and is unique to the underlying instrument or commodity.

The chart below plots the Alpha exhibited in selected commodities over the prior 52 weeks.

The precious metals produced the highest levels of unique returns or alpha whilst the laggards included agricultural commodities such as lean hogs, corn and Soya, in all three variants.

These negative readings tell us that these commodities underperformed the expected or market return.

Commodities Alpha

Source Good Money Guide research / Barchart.com

Those countertrend moves could have been profitable for traders, however, for example, high-grade copper traded as high as $2.88 in September last year and as low as $2.499 in August this year, that’s a range of around -13%.

The best commodities to trade at night

The major commodities trade around the clock but as with other markets, the later in the trading day the thinner the underlying markets can be. Simply due to a reduction in the number of participants when Europe and the US are asleep. However, some of the biggest consumers of commodities are in Asia, led by China. So, events and news flow in the far east can certainly move commodity prices. Once again, the big three commodities, oil, gold and copper are likely to be the most sensitive to Asian data and news flow and to offer the best overnight liquidity though as we have already noted even these markets can and do gap in overnight trade.

The best commodities to have traded in 2018

The best commodities to have traded in 2018 will have been those that had the biggest return or price moves the table below (part of the periodic table of annual commodity returns compiled by USfunds.com) shows us the major movers in the world of commodities during 2018.

Topping the table is Palladium, a precious metal similar to Platinum, which is used as a catalyst, that gained more than +18.5% in 2018. Wheat gained +17.86% and another grain, Corn, was up by +6.91%. The biggest losers were industrial metals like Nickel, Lead, Copper and Zinc. All of which saw sharp double-digit percentage price falls during 2018.

Commodities Heat Map

The best commodities to trade 2019

The table below shows the returns or percentage changes among leading commodities and benchmarks year to date. Precious metals are once again the biggest gainers Palladium enjoying a +29.60% gain up until the time of writing. Cotton and natural gas are among the biggest loser year to date in 2019. It has also been a poor year for agricultural commodities and foodstuffs alongside industrial and base metals. It’s also interesting to note the rather pedestrian performance of the general commodity ETF and the CRB commodity index. Two instruments that track the performance of a basket of widely used and consumed commodities.

Commodities Performance 2019

Source Good Money Guide Research/ Investors Intelligence


Which commodities are the most profitable to trade

Once again the answer to this will depend on how we approach the question as we have seen above precious metals, Platinum and Palladium have enjoyed large price swings during 2018 and 2019 to date. so one could argue that these have been the most profitable commodities. However in the grand scheme of things neither of these metals has a particularly liquid underlying market that might not be an issue for positional traders or investors who have long term time horizons, but for those trading over the short to medium term that could be an issue.

The +21.0% rally, in gold year to date, makes a very good case for the yellow metal, and given the level of uncertainty in the markets in Q4 2019 it seems likely that the price of gold will continue to fluctuate into the year ended providing us with plenty of trade opportunities.

It will also be hard to ignore crude oil in final stages of 2019 both the WTI and Brent contracts have fallen sharply in the last calendar year though more recently their prices have rallied China and America are still trying to find a resolution to their ongoing trade war. While OPEC, the oil-producing countries trade body, are scheduled to meet in Vienna in early December. Saudi Arabia OPEC’s most influential member is already shuffling its pieces on the chessboard ahead of that meeting, with a view to limiting supply and maintaining recent oil price gains if it can.

What are the most predictable commodities?

The commodity markets and predictability don’t usually go together. Even a market such as US natural gas which has been in a long-term downtrend (thanks to an ever-increasing supply from the shale/fracking booms in the USA) has undergone price spikes over recent years which we can see in the chart below.

Nat Gas

Source Investors Intelligence

If we are trading or investing in commodities, I think we would be lulling ourselves into a false sense of security if we started to think about their prices being predictable. Yes, there is often a cyclical element to the movements in commodity prices and commodities often trend as a result of that, but those trends can end abruptly, without warning. The spike in natural gas seen in late 2018 is a prime example (see above). So be warned complacency could prove to be very expensive when you’re trading commodities.

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