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Learn How to Trade Commodities Like a Pro

June 10, 2020 by Daniels Trading| Tips & Strategies

For anyone interested in learning how to trade commodities, there are several essential areas of study. First, it’s critical to select a market that is conducive to success. After that, buying and selling contracts efficiently is the name of the game.

The basics may sound easy, but expertise is required to become a consistently profitable commodities trader. In this blog article, we’ll cover the ins and outs of choosing a market and a few ways that the pros identify buying and selling opportunities.

Choosing the Proper Market Is Job No. 1

Featuring robust liquidity and inherent volatility, commodity futures are attractive financial instruments. However, they aren’t all alike. To capitalize on the upsides of these exciting products, professional traders understand that each contract is nuanced and offers unique opportunities.

If you want to learn how to trade commodities, the first step is to know your contract. Here’s a quick look at the divisions of commodities available on the Chicago Mercantile Exchange (CME):

Asset Class Products
Agricultural Corn, soybeans, live cattle, lean hogs
Metals Gold, silver, copper
Energy Crude Oil, natural gas

Aside from the equities indices, metals, energies, and ag products are among the most popular commodities. Each contract can serve a variety of purposes, and they are useful for speculative, hedging, and portfolio diversification purposes.

Read tips and tricks compiled from the advice of experienced futures brokers in our e-book:Basic Training for Futures Traders

Going “Long” the Market

If you’ve ever been to the grocery store, then you are familiar with buying commodities. Corn, wheat, beef, and pork are all commodities. But trading financial instruments based on these products is a bit different.

As the old saying goes, you make money when you buy something, not when you sell it. So how do you know when to buy or “go long” a given market? Well, that is the trillion-dollar question.

Basically, identifying when to buy a commodity boils down to finding value. For instance, on April 20, 2020, May West Texas Intermediate (WTI) crude oil futures traded at a low of $-37.63 per barrel.

Pretty much everyone in the markets agreed that oil was worth something―those who bought May 2020 WTI at the right time rode a vicious $45.00 24-hour rally to a close just above $10.00 on April 21. Though the action in WTI for April 20-21 was extremely rare, it is a valuable curriculum for anyone learning how to trade commodities.

“Shorting” the Market for Big Gains

Compared to trading stocks or ETFs, commodity futures offer distinct flexibility. Simply put, the name of the game isn’t only buying low and selling high; you can make just as much money selling high and buying low.

For individuals new to the market, the idea of “shorting” is a bit counter-intuitive. However, it really isn’t much different from going long. The key is to identify value, enter the market efficiently, and align risk to reward. Here are two kinds of contracts that professional traders view as shorting opportunities:

  • Overbought: A commodity contract may be considered overbought in a variety of ways. Some of the most common ones can be identified through the implementation of momentum oscillators such as stochastics or the relative strength index (RSI).
  • Inflated: Inflation is a tricky topic because the word carries a number of meanings. However, a commodity’s price can become artificially inflated because of breaking news, rumors, or a black swan event.

Much like “going long,” shorting the market successfully is all about spotting value. If a commodity is overbought and artificially inflated, then “going short” can be a profitable endeavor.

Once again, the April 2020 action in May WTI crude oil is a prime example of when to short a commodity. A major supply glut and limited storage capacity led to an unprecedented crash in oil pricing. Traders with foresight sold May WTI before the contract expired, and the results were windfall profits and a lesson in how to trade commodities for big gains.

Want to Learn More About How to Trade Commodities?

For those new to the futures markets, commodity trading can be intimidating. Choosing a market and identifying when to buy or sell are important decisions. To get off on the right foot, drawing from the experience of a market pro is a solid way to begin.

To learn more about commodity trading, check out the online educational suite at Daniels Trading. Featuring webinars, trading guides, and blog content, it’s your one-stop shop for all things futures and commodity trading.

Basic Training for Futures Traders

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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