How to trade Commodities

Commodities may be raw materials but they can be traded in exactly the same way as stocks and currencies. Investors buy commodities with the intention of selling it at a higher price in order to turn a profit. Alternatively, having sold at a high price, traders can buy back the commodity at a lower one.

Traders do not own the commodities that they invest in. Spread Betting/CFD Trading involves investors trading the movement of prices of the commodities. The advantage of this is that traders can invest relatively small amounts of money if they prefer, in very liquid markets – although the volatility of such markets can lead to heightened risk; rapid market movements can lead to rapid profits or losses.


Rolling Daily and Futures


Rolling Daily and Futures

Traders can invest in commodities in two distinct ways. A ‘rolling daily’ format is connected to the daily price of a commodity. Futures are based on the price of commodities over a longer period of times - days, weeks or months.

Investors who wish to make a short-term investment are more likely to use rolling daily contracts. The contract ‘rolls over’ every day until the investor closes the trade, or if the market moves in the wrong direction and the fund limit of the trader’s account is hit.

A futures contract closes at a predetermined date and time. Profit or loss is determined by the price of the commodity ​at expiration compared to the price when the trade was opened.


An example of a commodity trade


An example of a commodity trade

At ETX Capital you can can trade a wide range of commodities markets. These include agriculture (beans, grains, sugar), energy (gas, oils), livestock (cattle, hogs) and metals (silver, gold, platinum).

One of the most commonly traded commodities is gold and this is what we’re going to use as an example of a commodity trade, employing a rolling daily contract. If the current price of gold is listed as 1345.8/1346, the sell price is the first listed and the buy price is the latter.

We decide to trade £1 per point and choose to buy. The following day the commodity trades at 1348.6/1349 and we make the decision to end the trade and take the profit. Having bought at 1346 and sold at 1348.6, our £1 per point trade has resulted in a profit of £2.60.

On the other hand, had we originally made the decision to sell at 1345.8 at £1 per point and the end the trade the following day by buying at 1349, the difference of 3.2 would result in a loss of £3.20.

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