Commodity Trading Beginner's Guide: How to Profit from Repricing in the Industry Chain

Understanding Commodity Trading from Investment Approaches

Many beginners are often intimidated by the vast variety of commodities when first entering the market. However, if you approach it from an investment method perspective, you can better grasp the underlying logic of this market.

Derivatives trading is the primary way to participate in commodities, with futures and options being the core tools. For beginners, mastering commodity futures is essential as an entry point. Each futures contract corresponds to a specific spot commodity, for example, buying crude oil futures essentially involves betting on the spot price of crude oil for a certain month.

This means that before engaging in commodity trading, you need to clarify two key elements: what is the investment target (crude oil or copper?), and when does the contract expire? The latter is crucial because the logic of futures pricing is based on market expectations of future spot prices.

The Core Logic of Commodity Trading: Fundamentals-Driven

The factors influencing commodity prices ultimately fall into two categories: macroeconomic cycles and supply-demand dynamics of specific commodities. Industry insiders refer to this as “fundamental analysis.”

Taking crude oil, the most liquid energy commodity, as an example, its price fluctuations directly reflect global economic expectations. During the 2020 pandemic, global central banks implemented quantitative easing, leading to a phenomenon of “more money than goods,” which triggered a broad rally in commodities. This is a typical manifestation of fundamental forces—when major economies resonate in their cycles, the driving force behind commodities is strongest.

Beyond macro factors, for a specific commodity, you also need to track the dynamics of its entire industry chain, including production, transportation, and storage. It is this systematic fundamental analysis that determines the direction and magnitude of price movements.

Technical Analysis Needs Fundamental Guidance

Many traders rely solely on technical analysis for decision-making, but this is a common misconception in commodity trading. Chart signals can indeed help identify entry points, but they cannot answer a more important question: how long will this trend last? How big will the correction be?

Only fundamentals can answer these questions. Therefore, in commodity trading, fundamentals and technicals should complement each other—fundamentals provide the direction, while technicals optimize timing. This approach can improve win rates and risk control simultaneously.

Not All Commodities Are Worth Trading

Seemingly abundant in supply and demand, some commodities may not be suitable as trading targets. For example, electricity, despite its huge demand, is limited by regional restrictions and transportation issues, making it meaningless for most global traders.

The commodities truly worth considering for trading should meet several conditions:

Sufficient Market Liquidity — Only with enough participation can pricing be adequate and manipulation minimized. Mainstream commodities like crude oil, copper, and gold meet this standard.

Global Uniform Pricing — The commodity is listed on exchanges worldwide, forming a global reference price. Gold and crude oil are typical examples.

Ease of Storage and Transportation — Metals and major grains are less affected by geographical and climatic factors.

Standardized Quality — Regardless of origin, the quality can be strictly certified. Gold and crude oil meet this requirement.

Stable and Widespread Demand — There is long-term, continuous global need for these commodities. Oil, natural gas, wheat, and soybeans fall into this category.

Fundamentals Easy to Analyze — Supply and demand data are relatively transparent, allowing traders to judge based on economic logic rather than solely technical signals.

Commodities Worth Focusing On

Based on the above criteria, the following commodities are most valuable for trading:

Energy: Crude oil is the most liquid and widely used commodity. From plastic packaging to gasoline for transportation, the downstream industry of crude oil covers almost the entire industrial ecosystem.

Metals: Copper, aluminum, lead, zinc, and iron ore are key inputs for industrial production. Copper, due to its conductivity and versatility, is most sensitive to economic cycles and is often seen as an “economic barometer.”

Precious Metals: Gold and silver, because of their rarity and non-perishable nature, serve as stores of value and hedges. When risk assets are under pressure, they often become the first choice for capital preservation.

Agricultural Products: Soybeans, corn, wheat, and other staple grains are widely cultivated globally with stable demand.

Soft Commodities: Sugar, cotton, and others also have global pricing features, but their liquidity is slightly lower than the aforementioned commodities.

Among these, crude oil, copper, and gold form the “big three” in commodity trading and are the top priorities for beginners to master.

The Essence of Commodity Trading

From a macro perspective, participating in commodity trading is essentially about re-pricing the global industrial chain. When you anticipate accelerated economic growth, you might increase your holdings of crude oil and copper; if you expect inflation to persist, gold’s appeal rises.

Every trade reflects judgments about the global economic landscape, industry cycles, and supply-demand imbalances. This is why institutional investors often see commodity trading as an important tool for hedging and value enhancement, alongside stocks and bonds.

To achieve consistent profits in commodity trading, the key is not to guess short-term fluctuations but to develop systematic fundamental analysis skills, complemented by precise technical execution. Mastering this methodology is the first step toward a successful path in commodity trading.