A commodity is a loose term that describes a set of primary goods with shared features. Commodities are usually natural products that are used as first-stage inputs into more complex manufactured goods.
Commodities are generally seen as interchangeable within their sub-class and grade.
For example, copper is one of the world’s most widely used commodities. Copper is rarely purchased as a final good, and is instead used in various stages of the manufacturing of an extremely wide variety of products.
A unit of copper of a certain grade is largely interchangeable with any other unit of copper of that grade, unlike an individual smartphone brand, for example, which will have unique features that separate it from other smartphone brands.
Commodities are among the largest markets in the financial world, both in terms of value and sheer volume. While many of the more obscure and exotic commodity markets are still only accessible to direct physical traders, an ever-increasing number of commodities are now traded on publicly-accessible exchanges.
Most commodities are traded using futures that are cash-settled, which means that traders who enter the commodities market can take positions without having to worry about the delivery of the actual physical commodity.
Commodities and Day Trading
Commodity price action follows many of the same patterns that most day traders use in the equity and debt markets. While some commodity markets may be too small or too inactive for effective day trading, many more commodity markets offer excellent opportunities for the application of day trading techniques.
Commodity markets are an essential part of the modern financial world, and an ever-increasing number of commodities are becoming accessible to day traders through the use of futures on regulated exchanges.
These commodities represent an excellent opportunity to apply classic day trading techniques, often in markets that are less crowded with competitors.