A commodity is a basic good used in business that is similar or interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. When it comes to trading, commodities can be broken down into four groups or categories:
Metals: such as – gold, silver, platinum, palladium and copper.
Energies: such as – crude oil, natural gas, gasoline and heating oil.
Soft or Agricultural: such as – sugar, coffee, cocoa, wheat, soybean, corn, cotton and rice.
Meat or Livestock: such as – live cattle, feeder cattle, lean hogs and pork bellies.
The sale and purchase of commodities is usually carried out through futures contracts on exchanges. The exchanges will generally standardize the quantity of the commodity being traded. This standardize quantity will vary for different commodities. For example, the standard quantity of wheat traded is 5,000 bushels whereas the standard quantity for gold is 100 ounces. The exchange will also standardize the minimum quality of the commodity being traded such so that the quality of each unit of commodity traded is as close to the same level of quality – as possible – across the board.
Commodities can experience very large price movements quite suddenly because they are affected by events that can be impossible to predict – such as unusual weather patterns, natural disasters, epidemics and war – which is why trading commodities can be highly lucrative. A successful commodity trader will possess a proven trading strategy in order to capitalise on these price movements when they occur. Generally speaking, when the market is trending it’s like an escalator and when it corrects itself it’s like an elevator. This is precisely why mastering a trading strategy is paramount to your success.