What are commodities and how are they traded?
Learning objectives
Describe the three commodity categories and what makes a commodity tradeable
Explain how a retail commodity CFD relates to the underlying futures market
Recognise why contract sizes make commodity position sizing unforgiving
What is a commodity?
Commodities are the raw materials the physical economy runs on. Trading them means trading real supply and demand, which makes them behave differently from currencies in ways worth understanding before you size a position.
Two things define a property.
It's a raw material rather than a finished product. Crude oil, not petrol stations. Wheat, not bread.
It's standardised and interchangeable. A barrel of West Texas Intermediate is a barrel of West Texas Intermediate regardless of which well it came from. This is what makes a global price possible: buyers don't need to inspect the specific goods, because the grade is defined.
That standardisation is why commodity markets exist at all, and why a producer in one country and a buyer in another can transact against a single reference price.
Three categories of commodity
Energy. Crude oil in its two benchmark grades, natural gas, refined products. The largest and most actively traded group, and the one most exposed to geopolitics.
Metals. Split into two behaviourally distinct groups. Precious metals such as gold and silver, which respond to interest rates and risk sentiment as much as to industrial demand. Industrial metals such as copper and aluminium, which track construction and manufacturing activity. The Precious Metals course covers the first group properly.
Agricultural. Grains such as wheat, corn and soybeans, and softs such as coffee, sugar and cocoa. Heavily weather-dependent and strongly seasonal.
How to trade them
Most commodities are traded institutionally through futures: standardised contracts to deliver a set quantity at a set date. A crude oil futures contract is an agreement about a specific quantity of oil in a specific month.
Retail traders generally don't trade futures directly. The commodity you see on a broker platform is a CFD, and it typically tracks a futures contract rather than a spot price.
That distinction has a practical consequence that catches people out, so it gets its own section.
Rollover, and why your chart may not match the headline
Futures contracts expire. When the current contract approaches expiry, the market's attention moves to the next one, and your broker moves the CFD's reference from one contract to the next. This is rollover.
Two things follow.
The price can step. If the next contract trades at a different level from the expiring one, the CFD price adjusts at rollover. Most brokers apply a cash adjustment to open positions so you aren't advantaged or disadvantaged, but the chart shows a step that wasn't a market move. Know when your broker rolls each instrument.
The headline price you read in the news may differ from your platform. A news article quoting oil at a particular level is usually quoting the front-month futures contract. If your CFD has already rolled to the next month, the two won't match, and neither is wrong.
Neither of these is a problem once you expect them. Both are confusing if you don't.
Contract sizes are the trap
This is the single most important practical point in the lesson.
Commodity contract sizes are large, and they vary enormously between instruments. A standard crude oil contract covers 1,000 barrels. Gold covers 100 ounces.
So on one standard oil lot, a $1 move in the price is $1,000 to your account. On one standard gold lot, a $1 move is $100.
Compare that with forex, where How currency pairs work established a pip on a standard lot at roughly $10, and where a pip is a fraction of a cent.
A trader who has learned to size EUR/USD and then applies the same instincts to oil will be running a position many times larger than they intend. The instrument map: forex, stocks, indices, commodities, metals, crypto CFDs made this point about gold and it applies across the whole asset class.
Never assume a lot means what it meant on your last instrument. Check the contract size, work out what a one-unit move costs, and run the sizing calculation from Risk per trade: the 1% rule and position sizing from scratch.
Other practical differences
Trading hours vary by commodity and none of them run 24/5 the way forex does. Each follows the hours of the exchange behind its futures market, with breaks. Check before you assume a position can be exited at any hour.
Spreads are wider than on forex majors, and wider again outside the relevant exchange hours.
Volatility is higher. Oil moving several percent in a session is unremarkable, against roughly half a percent for a currency major.
Overnight financing applies, as it does to any leveraged CFD, and on top of that the rollover mechanics above.
Why trade them at all?
Three legitimate reasons.
Different drivers. Commodity prices respond to physical supply and demand, weather, production decisions and inventories. That's genuinely uncorrelated with the interest rate story driving currencies, so a commodity position isn't a disguised version of an existing trade, which is the correlation problem Managing leverage as a beginner covered.
Strong trends. Physical shortages and surpluses take time to resolve, which can produce sustained directional moves.
Clear narratives. An OPEC production decision or a drought is a comprehensible cause. Whether that makes it tradeable is a separate question, but it's easier to form a view you can articulate.
The honest counterweight is everything in the section above. Higher volatility, wider spreads, larger contract sizes and limited hours mean the same position size carries substantially more risk than it would in forex. That's manageable if you calculate it and expensive if you assume it.
Key takeaways
Commodities are standardised raw materials in three groups: energy, metals and agricultural. Standardisation is what makes a single global price possible
Retail commodity CFDs typically track a futures contract, so they roll periodically and your platform price may differ from a headline quote
Contract sizes are large and vary by instrument. A $1 move on one oil lot is around $1,000, so forex sizing instincts do not transfer
Commodities offer genuinely different drivers from currencies, at the cost of higher volatility, wider spreads and restricted trading hours