To make money, you need to understand commodity trading: from beginner to expert

Have you ever wondered why some investors are able to consistently profit in the commodity markets? The secret lies in understanding the logic of commodity trading. Today, let’s discuss how to start participating in one of the world’s largest asset classes from scratch.

First, learn to distinguish different types of commodities

When it comes to commodity trading, the first thing to understand is what it actually includes. Simply put, commodities (Commodities) refer to large-volume physical goods that are widely supplied, in high demand, and circulated globally. They are often at the top of the industrial chain, influencing the entire economic system.

Let’s break down these goods into six main categories:

Energy is the most important category. Crude oil is undoubtedly the king, because its downstream products are everywhere in daily life—plastic, gasoline, textiles, flooring, water pipes—almost omnipresent. Both supply and demand are enormous, making crude oil the most liquid commodity in the entire market. Gasoline, fuel oil, natural gas, and electricity also fall into this category.

Industrial metals mainly include copper, aluminum, lead, zinc, and iron ore. These metals are fundamental raw materials for industrial production and are closely related to the global economic cycle.

Precious metals include gold, silver, palladium, and platinum. Unlike industrial metals, precious metals have value preservation, hedging, and even currency attributes. They rarely corrode or degrade, making storage and transportation easy.

Agricultural products cover widely cultivated grains like soybeans, corn, and wheat.

Soft commodities refer to sugar, cotton, coffee, and similar products.

Livestock includes pork, beef, and other meats.

Additionally, due to the massive volume of maritime shipping in commodities, shipping indices are also considered a special trading category.

How to select truly tradable commodities

It may seem like there are many options, but not all commodities are suitable for investment trading. Many are limited by geography, circulation barriers, or have small price fluctuations, making them less friendly for retail investors. For example, although electricity has high supply and demand, its limited transmission scope and regional price influences make it an unsuitable choice.

So, what kind of commodities are worth your time to research and trade? I’ve summarized six core criteria:

First, liquidity must be sufficient. This means there should be enough capital participating in trading. When a variety of funds gather in a single commodity, prices tend to be more fully formed, and manipulation risks are lower. Crude oil, copper, gold, soybeans, and corn all meet this criterion.

Second, global pricing should be unified. The ideal trading commodities should be listed on multiple exchanges worldwide, allowing traders everywhere to participate and form a unified global market price. For example, crude oil and gold are quoted consistently across different exchanges.

Third, storage and transportation should be easy. Metals and grains are relatively less affected by climate or regional factors, and their storage costs are lower.

Fourth, commodities should be standardized. Gold is gold, crude oil is crude oil—regardless of origin, quality standards are strict, ensuring fair pricing.

Fifth, demand must be stable and widespread. Energy and food commodities have long-term stable demand worldwide, and are less volatile due to regional changes.

Sixth, analysis and operation should be straightforward. Fundamental information should be transparent and accessible, enabling you to judge price trends based on economic logic rather than relying solely on technical charts.

Based on these standards, the most worth paying attention to trading commodities include: crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton.

An interesting phenomenon is that when major economies’ cycles synchronize, the driving force behind commodities becomes particularly strong. For example, after the 2020 pandemic, global central banks coordinated to loosen monetary policy (QE), leading to a situation where “money exceeds goods,” inflation expectations rose, and commodities experienced a significant rally.

Practical methods for commodity trading

To participate in commodity trading, there are mainly two paths: physical investment and derivatives trading. Physical investment includes spot trading, mining investments, logistics investments, etc., but these are outside the scope of today’s discussion.

We will focus on derivatives trading, especially futures and options. For beginners, futures are the easiest tools to get started with.

Each futures contract corresponds to a specific underlying— for example, a crude oil futures contract’s underlying is crude oil. After selecting the underlying, the second step is to confirm the contract’s expiration month. Futures prices essentially reflect expectations of the spot price at a future date, so when trading, you need to predict what the spot price will be at that time and make trading decisions accordingly.

How to judge price trends in commodity trading

To profit in commodity trading, you need to master two sets of analysis tools.

First is fundamental analysis. Futures contracts ultimately point to the spot price in a future month, and the key factors influencing this are macroeconomic conditions, supply, and demand of the commodity. In other words, you should analyze the price direction and magnitude from an economic logic and industry supply-demand perspective. Fundamentals determine the main trend direction.

Second is technical analysis. Use charts, indicators, and other tools to find the optimal entry and exit points.

Both sets of tools are essential. Fundamentals need technical confirmation, so you can pinpoint the most accurate entry and exit points and control risks; technical analysis also needs fundamental guidance because pure technical signals cannot tell you how long a trend will last or its magnitude. Combining both is the key to successful commodity trading.

Summary

The core logic of commodity trading is actually quite simple: it is an asset class on the same level as stocks and bonds. Participating in it essentially involves re-pricing the global industrial chain. If you want to profit steadily in this market, you need to deeply understand the characteristics of different commodities and learn to analyze price trends by combining fundamental and technical analysis.

Finally, I recommend focusing on these key commodity trading assets: crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton. They feature good liquidity, unified global pricing, and clear fundamental drivers, making them ideal for long-term stable trading.