Commodity trading strategy: Building a Commodity Trading Strategy
On the crude oil market, tankers are used as floating storage when there is oversupply as traders wait for prices to rise. Trading commodities has become a popular means of inflation hedging and portfolio diversification. For many traders and investors, commodity trading is a preferred way to protect funds and reduce the overall risk for their portfolios. Commodities trading in the past was dominated by multinational conglomerates purchasing raw materials for production as well as major banks and trading houses.
Since these are bets on the future prices of these products, commodity futures are highly risky. One of the challenges with fundamental trading strategies is that it can require more time for research. Oftentimes, watching for technical chart patterns can be much easier than number crunching to develop fundamental forecasts.
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Trading styles
It can damage harvests, disrupt oil and gas production and hamper mining activity, as well as causing logistics problems. Conversely good weather can yield bumper crops, resulting in an oversupply of agricultural commodities. The emergence of China and India as major engines of growth has increased their demand for commodities.
By trading commodity futures, you enter an agreement with another investor based on the price you expect a commodity to trade at on a specified date. If you want to start trading commodities, you should become familiar with what moves the commodities market. If the supply of a commodity such as copper increases, the price decreases; and if supply falls, the price rises. A market cannot continue its trend without making new highs or new lows. It does not matter whether a trend is up or down, as the trader is buying new highs and selling at new lows. One critical caution for this strategy is that it performs poorly when markets are not able to establish strong, short-term trends.
When you trade a single Commodity, it gives you more time to analyse it in-depth. It also provides you with better trading prospects by allowing you to focus on just one prime Commodity. Crude oil is the world’s most traded commodity, with Brent crude oil from the North Sea providing the global benchmark market, and West Texas Intermediate acting as the US benchmark. For example, a 10% margin offered by Capital.com means you should deposit only 10% of the total value of the trade you want to open. Adverse weather conditions can have an impact on a range of commodities.
With fundamental analysis, your focus should be on the supply and demand of the commodity that you are interested in trading. For example, let’s say you want to trade Oil following news that war has broken out in a major oil-producing country in the Middle East or for example, the war that broke out in Ukraine in February 2022. Your fundamental analysis may indicate that the supply of crude oil will be reduced, leading to a possible shortage in the market and hence a hike in prices. Fundamental analysis might prove a little challenging as it requires a basic understanding of macroeconomic principles.
In addition, you can refer to news outlets to get a gist of the market’s condition. To do so, you can also read Plus500’s up-to-date free News and Market Insights articles. A commodity’s price only fluctuates dramatically when its global demand and supply increases or decreases. A range trading strategy identifies the support and resistance levels that the price establishes, typically using technical analysis indicators like Bollinger Bands or other charting tools. Range traders buy when prices are close to the support level at the bottom of a range and sell when prices approach resistance at the top of a range. A range trading strategy can be very successful, but it also comes with some caveats.
Breakout trading
For example, only the bravest of traders ever holds a large short sell position in orange juice futures heading into winter, when just one overnight freeze can send orange juice futures prices suddenly soaring. What are Pivot Points in ForexPivot Points help traders identify market reversals. With Pivot Points, traders can predict the support and resistance levels of a currency pair to make entry and exit decisions. A trader using a breakout strategy will seek to gain from buying just before a commodity price moves substantially higher or selling just before a price moves substantially lower. Position trading allows you to hold a trade for a long time, like months or even years, to benefit from long-term price movements.
Top Forex Trading Strategies That Actually WorkTrading in forex, you will come across several forex trading strategies — some more complex than the others. Top Reversal Patterns For Forex TradingReversal patterns provide traders with price levels at which the market can potentially reverse. How to Read Trading ChartsTrading forex live charts can help identify ongoing market trends, which can help you place successful traders.
A Good Place to Start
Nearly all major commodity markets tend to follow established seasonal price patterns. Both of these commodities tend to, year in and year out, rise into the winter months when demand is highest and decline into summer as demand falls off. The danger of breakout trading commodities is false breakouts (‘fakeouts’). Commodities are notoriously volatile, which means support and resistance levels can sometimes be breached without a sustained move following it.
What is Forex Spot TradingWith forex spot trading, one can make significant short-term profits by trading at prevailing prices. The Ultimate Guide to Trading Trends in ForexTrading trends in forex provides you with opportunities to identify the strong market direction and enter an order accordingly. Most breakout traders take a long position when the Commodity price crosses over the highest value of its price range. Using moving averages is one of the most common strategies for Commodity trading. It is a technical indicator that takes an asset’s average price for a specific period while smoothing out irrelevant prices by taking an average price.
When the dollar falls, commodities become cheaper for overseas buyers and increases demand. Use of commodities among manufacturers and other consumers is one of the primary drivers for prices. For example, if buyers are looking to purchase larger quantities of aluminium and supply is stable or low, they will have to pay more. Conversely, if demand falls and there is more aluminium available on the market, sellers will reduce their prices to attract buyers.
Similar action occurred in a protracted bull market that drove grain prices to record highs in the first decade of this century, followed by a general decline in prices that has generally been sustained since 2009. Again, while there are occasional sharp and volatile movements in commodity prices, commodities typically experience overall bull or bear trends that last several years. So one of the commodity trading secrets is simply the old trading adage, “The trend is your friend”. Finally, in commodity trading, it is just as easy to profit from selling short as buying long.
Is commodity trading profitable?
Commodity trading is one of the best ways to diversify your portfolio and protect yourself from losses incurred due to inflation. Commodity prices tend to be highly volatile, creating opportunities for traders to speculate on price fluctuations, although this equally carries risk of losses. If you want to start trading commodities you should be aware of the standard commodity market timing so you know when you can open and close trades. Major global economic trends and technological advances can change the way that markets trade. For example, the emergence of China as a manufacturing hub has increased demand for energy and metals, and redirected trade flows. Traders speculate on the future value of a commodity, aiming to benefit from price fluctuations.
Prices of commodities usually approach their peak when demand pushes prices to a new high. This high levels off when traders feel the price has maxed out creating the expectation for a fall. No one has yet offered a completely satisfactory reason for this fact, but it remains a fact that very few traders seem capable of trading all commodity markets equally well. There was a fairly well-known trader back in the 1980s who had a nearly flawless trading record in the cotton market. Copying his cotton trades back then would have been about the closest thing to just printing piles of money for yourself. Year in and year out, he called market highs and lows and trend changes almost as if he’d traveled into the future and already seen them all unfold.
