What Are Commodities and How Do You Trade Them?

Start Trading Commodities in Just a Few Steps

As a trader, the commodity market offers assets that are typically uncorrelated with equities and bonds, allowing traders to diversify their strategies while offering products that trade on separate fundamentals from other markets. In this guide, we’ll demystify commodities, exploring how they work and how they can be traded.

Trading commodity markets involves unique influences mostly separate from what moves the equity and bond markets. Driven by factors like supply & demand and geopolitical events, the commodity market provides distinct opportunities for traders looking to diversify their portfolios. Let’s dive into the steps required to get acquainted with this market.

Decide How You Want to Trade Commodities

There are several popular instruments to explore when trading commodities. One advantage offered by the commodity market is the lack of correlation with the stock or bond market. This makes commodities attractive to those looking to trade products that are influenced by factors mostly unaligned with equity and bond markets.

Traders can gain exposure to the commodities market through several different ways. Futures, the most popular method, give traders liquidity and leverage by allowing them to buy or sell a certain amount of a commodity at a preset price on a future date. You can also trade commodities through exchange-traded funds (ETFs) such as the Invesco DB Commodity Index Tracking Fund, which provides a liquid and diversified basket of commodities. Alternatively, investing in commodity stocks offers indirect market engagement by trading companies like Chevron, Newmont, and Archer-Daniels-Midland, which reflect the price of crude oil, gold, and several commodity products, respectively.

Each approach presents unique opportunities depending on a trader's objectives and risk profile. We will dive deeper into each of these trading methods later in this guide, providing more comprehensive insights into their mechanics and applications.

Select the Commodity Product You Want to Trade

The commodity market offers a broad array of products. Here are a few categories available to trade:

• Energy: Crude oil and natural gas make up the two most popular commodities in this category, with futures and options on futures available to trade, among an offering of ETFs and stocks.
• Metals: Gold, silver, and copper offer a highly liquid futures market for traders, along with options on futures, stocks, and ETFs as well
• Agricultural Products: Corn, wheat, and soybeans are the main agricultural products for traders.
• Livestock: Lean hog futures and live cattle futures give traders the ability to speculate on the price of pigs and cattle.

Choose the commodity that aligns with your risk tolerance and market outlook.

How to Trade Commodities: Step-by-Step Guide

Commodities trading can be highly rewarding, but it is not without risks. Traders need to know what moves these markets, as well as have an understanding of the commissions and fees that come along with each product. The following steps are the basics that any trader should understand before diving into these products:

1. Understand How Commodity Markets Work

Commodity markets are influenced by a variety of factors, making them dynamic and complex. Here’s what you need to know:

• Supply & Demand Dynamics: Shortages or surpluses in the supply of a commodity impact its price. Everything from the weather to geopolitical events, to advances in technology can impact the inventory levels and thus the price of the commodity. For instance, crude oil prices move based on the level of inventory in the United States. Reports from government agencies like the Energy Information Administration (EIA) can impact the price of crude oil. Typically, when inventory falls, prices rise and vice versa. The United States Department of Agriculture (USDA) releases statistics on crop yields and forecasts. A notable monthly report is the World Agriculture Supply and Demand Estimates, commonly referred to as the WASDE report.
• Geopolitical Events: Geopolitical events from war to trade measures—such as tariffs—can impact the prices of commodities. For example, the war in Ukraine led to a dramatic increase in the price of natural gas as traders expected retaliation from the West against Russia, targeting its energy complex.
• Economic Indicators: Inflation, currency prices, and economic strength in countries that are major producers or consumers of a commodity can impact prices. Consider the interest rate set by the U.S. Federal Reserve. When interest rates fall, it makes gold more attractive, since the rate of return on other assets seen as stores of value produces less income. Specifically, when rates fall, money market accounts offer less interest. This makes gold more attractive as a non-interest-bearing asset.
• Seasonality: Certain commodities are affected by seasonal changes that influence the supply and/or demand of that commodity. Namely, soybean prices typically fall in August ahead of the harvest season in September. As farmers collect their soybean crop, supply increases thus lowering prices all else equal. Grasping these concepts can help you make informed trades and speculate, hedge, or invest according to your market assumption.

2. Choose the Commodity You Want to Trade

At tastytrade, you can select from a vast array of commodities in different sectors. Here is the full list of available CME futures contracts.

• Energy Commodities: Often linked to global geopolitical events and inventory levels, crude oil is among the most traded commodities in the world. This makes it ideal for traders looking for a liquid commodity that also offers a full set of options on futures.
• Precious Metals: Acting as both a store of value and a hedge against inflation—gold, silver, and copper often react to changes in monetary policy in the United States, Europe, Japan, and China.
• Agricultural Products: Weather, global inventory levels, and the strength of exports among major producers most often impact commodities such as corn, soybeans, and wheat.

Your choice should reflect your expectations from those factors, your individual risk tolerance, and your trading strategy.

3. Choose How to Trade or Invest in Commodities

There are several ways to trade commodities: a deeply liquid futures market, an expansive list of exchange-traded funds (ETFs), or stocks represented by businesses that focus on commodities.

• Commodity Futures: Futures represent contracts to buy or sell a certain amount of a commodity at a future date and certain price. Futures are the most popular method for traders seeking leverage and liquidity.
• Commodity ETFs: ETFs provide a way to gain broad exposure to commodities without direct exposure to the physical asset. ETFs such as the Invesco DB Commodity Index Tracking Fund are among some of the most liquid in this category.
• Commodity Stocks: Companies that have direct exposure to producing or trading commodities are another option for traders. Some liquid names in this category include oil producers like Chevron, gold miners like Newmont, and commodities trading corporations like Archer-Daniels-Midland.

Each asset type comes with its own pros and cons. The choice for the individual trader should be based on risk tolerance and investment objectives, among other factors.

4. Open a Trading Account

tastytrade offers an intuitive, award-winning platform* designed for both novices and experienced traders alike. Open your account now and explore a wide range of commodities, trading tools, and resources.

5. Identify Your First Trading Opportunity

Finding the right opportunity requires diligence and analysis:

• Stay updated: Follow financial news, government and industry reports, and commodity-specific updates such as the USDA’s WASDE report for corn, soybeans and wheat, or EIA reports for crude oil and natural gas
• Technical analysis: Use chart patterns and identify areas of support and resistance to generate assumptions on future price movements
• Fundamental analysis: Assess the value of a commodity by examining its supply & demand levels, geopolitical events, and economic indicators

6. Open Your First Position

After identifying an opportunity, it's time to trade. Decide whether to:

• Buy (go long): If you believe the price of a commodity will increase
• Sell (go short): If you expect the price of a commodity to fall

Consider your position sizing based on your individual risk tolerance and overall trading strategy. Leverage can increase both gains and losses, so managing risk through sizing, entry and order exit levels and monitoring your trade can impact your profit or losses. You must also consider the commissions and fees associated with your trades, as they can skew your profits and losses.

7. Monitor and Manage Your Trades

Once your position is live, it's essential to monitor your trade, as market conditions and factors impacting the commodity can affect prices on a day-to-day basis. You can utilize tastytrade’s suite of tools to track real-time data, set alerts for price changes, and adjust your strategy.

• Risk management: Evaluate your trades consistently and use stop-loss orders to minimize potential losses.
• Adjust positions: As market conditions change, be prepared to alter your positions to optimize returns.