Commodity Trading UK- Complete Guide

Commodities are perhaps the most unique investment in your investment portfolio. Opportunities can be very difficult to find sometimes but it is not simple. This comprehensive guide will explain everything related to commodity trading UK.

Here in this guide, you will find everything that you are required in commodity trading. Here you will know what is commodity trading? What are the ways of commodity trading? Is commodity trading beneficial for you? Read this guide till the end to know everything about it.

Commodities Trading UK - Opportunity or Risk

What is Commodity Trading?

Commodity markets are markets for buying, selling, and trading commodities or intermediate products. Commodities are the part of the day to day life and it includes your grains, pulses, metals, livestock, and solid metals.These everyday life goods are tradable and easily exchanged. It can be classified as any type of personal property that can be bought or sold, except for litigation claims and money.

Commodities are often divided into two categories: hard commodity and soft raw commodity. Hard commodities are also considered as solid commodities that consist of the natural raw materials that are extracted through mining such as gold, silver, platinum, energies, and gas while soft commodities consist of agricultural goods including wheat, tea, coffee, corn, and other grains.

Let’s take an example that you want to trade oil. At $35 a barrel, you think the asset is overvalued. So you place a purchase order worth €100. If you exit your position when the price of oil crosses $35, you make a profit. Similarly, you can think of gold as being overvalued at $1,900 an ounce.

Commodity trading is popular with UK investors due to the leverage offered by online brokers. This is 1:20 for gold and 1:10 for all other commodities. You mustn’t have to own or store the products you choose to trade with. Instead, you just decide whether you want to place a buy or sell order, the amount you want to bet on, and the broker takes care of the rest.

Also Read: How to Trade Forex UK

Ways of Commodities Trading

You can invest in commodities through several ways like future contracts, options, exchange-traded funds (ETFs).  Few common ways we will discuss here below-

CFDs

Contract for difference is the easiest and cheapest way to trade commodities in the UK. CFDs are financial instruments that are created for future date by online brokers. Your task is to track the value of your assets in real-time.

CFD instruments only track the actual price of the instrument and this makes the trade easy. Traders are not obligated to own the goods or to worry about their physical storage. Instead, traders are needed to accurately predict in which direction the price of a commodity will go.

You can use CFDs to trade almost any asset class possible such as gold, silver, oil, wheat, sugar, natural gas, grain, and more. CFDs are also great for trading commodities when you want to start with a very small amount. After all, you will not own any assets, so the minimum transaction amount is usually a few pounds.

ETFs

ETFs are exchange-traded funds (ETFs) are the instrument that invest in hard and soft commodities on behalf of the traders. Commodity ETFs focus on a single commodity that is typically physically stored or invested in commodity futures contracts.

Best Commodity ETFs allow you to invest in a group of assets in a single trade. Commodities allow you to directly invest in the future value of assets such as gold.

This particular option is best for those who want to invest in commodities for the long term. This is because the fees associated with ETFs are typically less than 0.5% per year. As with stocks and equities, you can end your ETF investment at any time during normal market hours.

Futures

A futures contract is a legal agreement to buy and sell commodities like gold and oil at a specific price at a predefined time in the future. Futures contracts are predetermined contracts in terms of quality and quantity to facilitate trading in the futures market. The buyer of a futures contract is obligated to buy and receive the underlying asset when the futures contract expires. The seller of a futures contract is obligated to offer and deliver the underlying asset at the expiration date.

For example, if a trader makes a future contract on wheat for three months that the price may reach up to $200 bushel. You will make money when you take a long position and the wheat contract closes at $210 bushel. However, there is a loss if the contract closes at $1900 bushels.

Options

Commodity options trading is widespread worldwide, with major exchanges such as CME, NYMEX, LME, and ICE offering commodity options ranging from gold to petroleum and industrial metals.

The UK commodities market allowed gold options and opened new avenues for trading and hedging. However, traders and investors need to understand options trading in commodities markets because the flows and processes in the stock and foreign exchange markets are different.

In general, there are two types of commodity options, similar to the stock and currency markets: call options and put options. All options trading have two sides: buyer and seller. Each of these aspects experiences the opposite effect. When the option buyer makes money, the option seller loses money at the same stage and vice versa.

What Commodities are available in the UK market?

Commodities fall into one of two main categories-

  • Hard commodities
  • Soft commodities

Hard commodities usually consist of natural or mineral resources such as gold, copper, or petroleum. Soft goods, on the other hand, soft commodities include agricultural products or livestock products that must be managed or cultivated to produce agricultural products. In both cases, commodities are traded based on supply and demand, and their value is strongly influenced by various macroeconomic events.

Hard Commodities

Hard commodities are considered the top commodities because they are seen as the basis for the health of the economy. Because the production and supply of hard goods can be predicted with great accuracy, their performance is considered an indicator of global economic health.

The majority of the light commodities market consists of energy commodities such as natural gas and crude oil trading. The sector also includes a variety of commonly used metals such as steel, aluminum, gold, copper, and silver. Few hard commodities are-

  • Gold
  • Silver
  • Platinum
  • Palladium
  • Aluminum
  • Copper
  • Tin
  • Zinc
  • Lead

Soft Commodities

Soft commodities include agricultural and livestock products. Unlike hard commodities, prices for soft commodities can fluctuate dramatically from time to time because they are affected by a wide range of forces that determine supply and demand.

Soft commodities are highly affected by weather conditions. An unusually cold winter, an unusually warm summer, or a severe storm can affect livestock and agricultural production. This makes it difficult to predict the direction of commodity prices, which can lead to high volatility. Few soft commodities are-

  • Wheat
  • Sugar
  • Cotton
  • Soybeans
  • Tea
  • Coffee
  • Corn
  • Grains

Advantages of Commodity Trading UK

Diversification in the portfolio

Commodities also allow you to diversify the portfolio from the traditional stock market. This is not an exact science, but often during difficult economic times; investors will turn to commodities like gold. Gold prices soared during the 2008 financial crisis. For this reason, seasoned investors typically invest part of their portfolio in precious metals because it’s a great way to hedge against a stock market crash.

Store of Value

From the beginning gold is considered as the store of value, it is one of the most consistent metals that never faced bad back draw. Store of value means the commodity retains its value because it does not depreciate. Investors use stores of value to protect their assets from inflation risks. As mentioned above, they also provide a way to prepare for a stock market crash. If you are looking to access the online commodities market to invest in a store of value, your best option may be an ETF. Read more about Best ETFs UK 2021

The long or short position

There is always a long or short option when trading commodities. This is very helpful for trading because if you can predict accurately, the direction of the market is meaningless. But when you invest in traditional assets like stocks then it limits the chances of making a profit in case the prices of shares will decline.

For example, there was no demand for oil during the coronavirus pandemic. Of course, the value of oil in the open market plummeted. Qualified traders will undoubtedly sell the oil price through a sell order. All UK Commodity Brokers offer the ability to long or short any asset of your choice.

Leverage

UK investors can leverage their commodities trades. ESMA regulations limit this to 1:20 for gold and 1:10 for all other asset classes. This allows you to trade much more than you would on a brokerage account.

How to make Profits via commodity trading

Just like other assets commodity performance will depend primarily on the amount you invest and the products you invest in agricultural and mineral products.Here we will tell you how you can make money with commodity trading.

A long position on Oil

Suppose a trader thinks that the value of the oil will increase in the short term so he created a future contract. At the time of creating the account, the prices of the oil are £40 per barrel. He created the buy order for £500 with 1: 10 leverage. After few weeks the prices of oil will rise to £50 per barrel. This will increase the profit up to 33%. If you are satisfied with the performance then you can close the position and vice versa.

Some Strategies for Commodity trading

We have done a comprehensive study on top trading strategies. After doing the full evaluation we have picked the top strategies for our readers-

Fundamental Trading

Fundamental trading is a strategy that can be based on both technical and fundamental indicators. Basic trading strategies usually look at market fundamentals based on unique market factors rather than technical trading dynamics.

For example, a merchant may purchase soybeans because the summer weather is dry, which increases demand due to a decrease in the supply of the harvested crop. Another example could be Wednesday with the actual supply of oil. Oil prices are likely to surge when China announces an increase in oil demand and traders will have to wait a long time to hear the news.

Breakout Trading

A breakout strategy is to take advantage of short-term movements. A trader using a breakout strategy will try to make a profit by buying a commodity just before the price rises much higher, or by selling just before the price falls much further.

Breakout strategies can use range trading at specific support and resistance levels but are not limited to support and resistance levels. An outbreak can occur at any time. Identifying breakouts allows traders to take advantage of significant price increases or decreases.

The philosophy behind breakout trading is relatively simple. The market cannot continue the trend without reaching new highs or lows. This strategy works best when the trend is strong and sustainable.

Range Trading

Range trading is a strategy used in all types of financial market trading. They are often based on charts of Bollinger Bands or other channels that show support and resistance levels.

A range trading strategy is to buy at the support level when the price is below the range and sell at the resistance level when the price is above the range.

Lows and highs are strongly influenced by supply and demand trading. Commodity prices typically approach their peak when demand drives the price to a new high. This high level falls when traders feel that the price has peaked, creating expectations for a decline.

Technical Strategy

Technical analysis is a fundamental skill that you must master if you want to trade commodities in the short term. For example, a daily trader places a buy or sells order in a selected market and leaves the position after few minutes or hours later. By doing this he will try to profit from small price fluctuations of commodities.

Technical strategy is usually applied by Swing traders to exploit the opportunity of the trading period. They can hold open positions for several days, but can also hold trades for weeks. It is intended to align its position with the current evolution of the market.

Are there any risk associated with commodity trading?

There are so many opportunities in commodity trading but there are so many risks associated with commodity trading. We are discussing few risks here-

Volatility

Commodities like gold and oil are much more volatile than traditional top-tier stocks. On the one hand, it will be a huge boon for experienced traders as a volatile market offers many profit opportunities. Sometimes beginners may find it difficult and risky. In the end, you will experience much greater gains and losses in the short term.

Limited Markets

UK brokers often offer access to thousands of stocks in a variety of domestic and international markets. You can diversify your portfolio by investing in different commodities. However, the online platform is rather limited when it comes to commodities. In some cases, you only have access to gold, oil, and natural gas. This can lead to overexposure to certain commodities.

Leverage

You can trade stocks in the UK retail market with up to 1:5 leverage. However, you can trade gold at 1:20 and all other commodities at 1:10. While this has the potential to increase the result, it can also have disastrous effects if a sound risk management strategy is not used.

No Income

Investing in stocks allows you to receive regular dividends. Receive coupon payments on bonds. Either way, you can grow your wealth much faster and enjoy a passive income stream. However, commodities do not generate income, so they can only make money through capital gains.

Few Tips for Commodity Trading

Take a look at variable

It’s supply and demand. It is important to correctly map the variables that affect these two components. Know your market. When trading gold, it is important to understand the demand. Similarly, understanding geopolitics and issues in oil trading are critical to predicting price movements.

Diversify the portfolio

You can only trade commodities while using a diversification strategy. Then it would be a matter of choosing a product whose price is not linked. For example, if you trade soybeans and livestock, the two commodities are related and changes in the price of soybeans affect the price of livestock. As a result, the investment is not diversified. When trading gold and soybeans, the price relationship is much lower and the investment is more diverse.

Pay attention to leverage

This advice is even more applicable to new investors. You can gain a lot from leverage, but you can also lose everything. So, be careful if you are new to trading.

Master technical analysis strategy

It is a tool that can be used for many assets, including commodities. As we have seen, they allow us to identify evolutionary trends in prices. There are many indicators, but using them all can backfire, so it’s a good idea to focus on three or four tools. The most used are Bollinger Bands or Moving Averages.

Use risk features like “Stop Loss”

This point follows the previous point. Because of the high leverage, setting the relevant Stop Loss and Take Profit levels is very important for trading. This is the automatic resale threshold for that asset. When the price of an asset goes down, the Stop Loss level comes into play. What matters when going up is the level of earnings. These are the minimum and maximum resale thresholds.

How to Start Commodity Trading UK- Tutorial

Now we will discuss that how one can start trading in commodities. It is not very tough to invest in commodities; traders are needed to open an account with a regulated online broker. Follow these steps to start commodity trading-

Step 1: Choose a Commodity Broker

The first step in investing in commodities is to open an account with an authorized broker. In an extensive study of the best online trading brokers, we found that the names eToro, Capital.com, and Plus500 are the most reliable.

Step 2: Create the account

Suppose we are opening the account with eToro. It only takes a few minutes to open an account with eToro. All you need to do is enter a few personal information such as full name and in addition to your social security number, email address, and mobile phone number.

Step 3: Account Verification

All brokers regulated by regulators are required to verify user accounts according to the Know Your Client (KYC) protocol. When registering, you will be asked to answer a series of questions so that the broker knows your investment habits. After you create your account, you will need to verify your account using two documents- ID card, and address proof.

Step 4: Deposit the funds

Once confirmed, you can also add funds to your account using the blue “Deposit” button at the bottom of the sidebar. You can then deposit money using a variety of payment methods including credit card or debit card, PayPal, bank transfer, wire transfer, e-wallet, and others. Once you have selected the desired amount and payment method, simply click the blue “Submit” button.

Step 5: Start commodity trading

Once the funds are deposited you can start trading. To enter the commodity market, you have two options. The first is to directly search for the name or type of raw material in the search bar at the top of the page. You can then search by typing “gold” or “silver” into the search bar. The second option is to use the Markets tab in the left sidebar. Then you can select “Commodities” at the top of the page. You should go to the next page. Opening a position in the product is very simple. Just click on the product and then click “Invest” or click “Buy” in the menu above.

Conclusion

Anyone can easily trade in commodities like soft commodities and hard commodities. Commodities are getting popular day by day and traders are moving to invest in commodities. After the Coronavirus pandemic traders are seeing more opportunity in commodity trading.

In general, when trading physical assets, you may need to be able to store tons of commodities.Most traditional trading methods (intraday trading, swing trading, using trading robots, etc.) are compatible with commodity trading. Finally, remember that commodity trading is still very specific, especially in terms of the risks involved. Geopolitical or climatic risks are much greater than other forms of investment.

FAQs

Is commodity trading for beginners?

Yes, it is entirely possible to trade commodities as a beginner. However many variables need to be understood so it is advisable to get proper training before investing in these products.

Is gold still a safe haven asset in a recession period?

Yes, gold is the safe-haven asset in the adverse condition of the recession period. Consumer demand collapsed while speculative demand offset this decline in the market.

What is the best commodity to trade?

Gold is the best commodity to trade. Gold is considered a safe-haven asset.

Where I can trade commodities?

Traders can trade in commodities by opening an account with the online broker. In an extensive study of the best online trading brokers, we found that the names eToro, Capital.com, and Plus500 are the most reliable.