The markets evolve regularly, and its newest trend is commodity trading. Similar to any field of investment, many people are apprehensive about investing and trading. While humans have dealt in equity and real estate for decades, commodities are relatively new.
Commodity trading in the past stuck to commercial avenues. However, its reintroduction with space for price speculation comes with limitless opportunities. It is crucial to learn to trade commodities before the trends change. While many people understand markets and economies, few understand strategies and trading factors. Worry not because this guide breaks down common trading strategies and why they work.
Introduction to Commodity Trading Working
Trading in raw materials involves future and spot contracts. Future contracts promise specific amounts of the respective commodity at a future date at a fixed price. On the other hand, spot agreements involve immediate trading. By predicting market conditions, traders buy low and sell high, making a profit.
However, a typical deal involves thousands (if not more) of contracts. While managing large quantities, traders employ varying trading strategies to maximise profits.
Most of these strategies apply to price speculators. Commercial traders solely focus on buying low for material supply to run refining or processing businesses.
Numerous factors influence price movements or fluctuation, such as environmental incidents, unprecedented political disruptions, supply chain issues, short supplies, and high demands. With these steadily varying factors in mind, one can opt for a suitable trading strategy.
Commodity prices can fluctuate regularly. Range trading involves identifying a price range for specific commodities. This active investing strategy buys commodity contracts at support levels or low ranges and sells them at resistance levels or when prices reach a pre-defined higher range.
Some traders use data analysis software to chart these ranges, while others analyse and draw them out for personal use. Working within a range rather than intuition makes profit steady rather than volatile. Range trading is typically a spot-contract strategy since future contracts see higher market condition volatility.
While deciding on ranges, traders also examine relative strength indices, rate changes, and stochastics.
Some markets may enter overbought or oversold areas. In such cases, range trading becomes obsolete since determining key entry and exit points becomes increasingly difficult.
A breakout strategy utilises sharp drops and increments over a short period. Markets cannot remain stagnant without new highs and lows. Traders purchase immediately before prices increase and sell right before they drop. By identifying breakout points, they maximise profits over short terms.
Once you learn to trade commodities, it is evident that not all markets can establish definite short-term trends, and identifying breakout points becomes difficult. Volatility and inaccurate prediction can easily throw this strategy out the window.
While foolproof and relatively more logical than technical, fundamental trading is time-consuming.
The fundamental trading strategy closely examines market developments, especially factors that affect supply and demand. These factors include political and environmental, requiring copious amounts of research.
For example, a trader can interpret a political dispute as a foreseeable crude oil supply chain disruption. They would buy oil commodities while predicting an increase in price due to limited supply.
Technical chart patterns often have exceptions, whereas fundamental trading strategies rely solely on readily available information and logic. While foolproof, such a trading strategy requires traders to remain alert and informed.
Fundamental trading requires traders to crunch numbers and data to create forecasts. Many traders consider this activity time-consuming and tedious. However, as a commodity trader, it is crucial to stay up-to-date on market developments through papers and economic news.