If you want to start trading gold, crude oil, wheat or coffee, there are some golden commodity trading tips that you must know. What successful strategies for commodity trading you should follow? This question is going to be answered here, along with how to profit from both bull and bear markets.
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If you want to learn how to win commodity market trends you have landed in the right place.
With so many types of commodity trading, there is always going to be one commodity that will have a significant trend. To be able to capture those trends you need first to understand what causes the major rise and fall in the price of commodities.
We’re going to break down some major factors that drive the commodity price along with some successful strategies for commodity trading.
What is the first thing that you think about when someone mentions the commodity market?
Many will say, what is a commodity?
What are Commodities?
In layman terms, commodities are the real products around this planet that make everyday transactions and economies turn. Commodities are a type of physical wealth–this is different from stock and bonds, which merely represent wealth. Things like crude oil, corn, cattle, livestock, gold and everything that has a physical substance that people will trade.
Commodities are also used by a lot of traders.
In essence, we don’t want to physically trade the actual commodity. Instead, we will trade commodity contracts.
So, how traders are taking advantage of the commodity market?
Commodity traders can access the futures market and use futures contracts without actually taking the physical commodity.
Please check how the futures market work here: Futures Trading Strategies (Trading Futures for Dummies).
The most important thing to know is that when we’re trading the futures market, we’re basically speculating on the price movement of that market.
Before we give you some commodity trading recommendation you need to learn how many types of commodities are there.
Just like how stocks are categorized into sectors, there are different types of commodities.
Below, our team of experts will give you a brief overview of the different types of commodity trading.
How Many Types of Commodities are?
There are largely three main types of commodities:
- Metals (with the most traded metals being gold, silver, copper, iron, palladium, and platinum).
- Agricultural products or soft commodities (coffee, cocoa, wheat, corn,etc.)
- Energies (crude oil, natural gas, coal).
These labels are used quite often to describe groups of a particular commodity that has its unique characteristics. These types of commodity derivatives are often used in conjunction with complex strategies.
Buying and selling commodities are not the same as buying and selling stock shares.
This means you need to deploy new commodity trading techniques to take advantage of the cyclical bullish and bearish commodity trends.
But before we jump into the best derivatives strategies our team of experts has been using for decades, let’s share some commodity trading tips.
These commodity trading tips are essential for your survival.
And you’re probably wondering…
How is this going to help you win in the commodity market?
Simply put, commodities are extremely volatile instruments. So, you need some trading tips to navigate the high risk associated with commodities. Otherwise, the commodity market can crash you.
Let’s get started…
Commodity Trading Tips
Trading the most popular commodities is a wonderful opportunity to make big profits. What is even more interesting about the commodity market is that its extended long-term trends make it the favorite market for position trading.
Check out HERE how the positional trading strategy made the top 25 highest-earning hedge fund managers a whopping $17 billion in profits in 2017.
So, the first tip is that more profits can be made if you’re a positional trader. However, the best commodity intraday trading strategy can also be used to speculate on the intraday high volatility.
Now, let’s examine some other commodity trading tips that can help you become a better trader.
Commodity Tips #1: Commodities Have Strong Cyclical Trends
You need to be aware of the nature of commodity cycles.
Typically, all commodities move in cyclical trends, which are powered by the investment behavior of producers. Many of these commodities will experience price changes that are entirely seasonal. If you know how to identify the commodity cycles, you’ll be able to successfully trade them.
Below we’re going to outline, key points of why commodity cyclical trends are so strong:
- Compared to forex currencies, commodities have 3x higher volatility.
- And, 35% more volatility than stocks.
- Supply and demand analysis are the main drivers.
- Economic conditions, geopolitical factors are also factors that affect these cyclical trends.
If you want to trade commodity cycles here is what you need to do. Forecasting the commodity cycle comes down to following a 5-step process:
- An increase in demand.
- Capital expenditure to increase production, which leads to higher prices.
- The higher prices will start to erode the demand.
- The supply increases above the demand, this will lead to a fall in commodity prices.
- Capital expenditure is curbed due to lower prices, which reduces supply and subsequently creating supply and demand equilibrium. And the process starts all over again.
Commodity Tips #2: Use Volatility to your Advantage
What do we mean by this, is that each commodity has different levels of volatility.
For example, oil prices tend to move more than coffee or wheat.
What you have to do is to simply establish the price range of your favorite commodity and trade accordingly. This will help you achieve two things. First, you can adjust your position size based on the level of volatility and secondly, it can help you determine appropriate levels for your take profits if you’re day trading the commodity market.
Commodity Tips #3: Commodity and US Dollar Correlation
The value of the US dollar can influence commodity prices. Between the commodity prices and the value of the US dollar, there is a negative correlation.
For example, if the greenback appreciates, typically commodities like gold and crude oil will move lower. The same is true in reverse.
So here’s the lesson…
If you want to capture the big commodity cyclical trends, you need to learn how to implement all the above-mentioned tips.
Now, let’s study some MCX commodity trading strategies that will use some of the commodity trading tips mentioned above.
Let’s get started…
Successful Strategies for Commodity Trading
Since there are many types of commodities and all have their own price behavior, we need to adapt some trading strategies that work across a variety of commodities.
However, some traders have managed to develop some strategies that are uniquely fitted for a specific commodity. When you include factors such as volatility, supply and demand, cyclical trends, etc. some strategies tend to be more profitable only with some commodities.
That’s the reason why we want to present to you different types of successful strategies for commodity trading.
Each commodity trading strategy has its pros and cons, so it’s up to you to determine which one works for you.
Let’s get started…
How to use 200-day MA to Buy Commodities
If you want to predict which commodity trading levels are worth to base your trade-off, then look no further than the 200-day moving average.
The 200-day EMA is regarded as being the standard measurement of bullish and bearish trends in the commodity market. However, a breakout of the 200-day EMA is not always a reliable signal. The reason is that like with all technical indicators it’s prone to give multiple false signals.
See the commodity chart below:
A simple solution to this very common problem is to wait for the breakout of the 200-day EMA and a retest.
This means that you can buy/sell commodities at the first retest of the 200-day EMA.
See the example below where we highlight on the gold chart:
Now, we know that not many traders have the right amount of capital to invest in the long-term.
Holding a position for a yearlong period is not suitable for everyone.
If you don’t have a big account balance and the patience to ride the cyclical commodity trends, you’re better off if you stick with short term commodity trading.
Below we’re going to outline how to trade commodity with little money.
Let’s get started…
Day Trading Volatility Breakout Commodity Strategy
The volatility in the commodity market is a key source for big profits. However, not all commodity markets are created equal. Some tend to exhibit more intraday volatility than the others.
For example, crude oil is one of the most volatile commodities. On the other hand, agricultural commodities have much lower average trading volume and subsequently are less volatile.
For this commodity intraday trading strategy we’re going to use the previous day’s high and low.
Here’s how it works:
- Note down the highest and lowest prices from yesterday’s trading session.
- Multiply the previously recorded values by 0.25.
- The new value should be added and then subtracted from the current day’s opening price.
Basically, the result of this 3-step process is that you establish a trading range. And, the potential breakouts of this range can lead to profitable commodity signals.
Here is an example.
For this strategy, the rules are simple. A breakout above the established range is a buy signal, while a break below is a sell signal.
Now, this is important…
The next commodity strategy is a popular method used by commodity producers to hedge risk.
Cross Commodity Trading Strategy
Cross commodity hedging also known as cross hedging is a technique that involves buying and selling two positively correlated commodities.
Commodity hedging is a very complex topic.
But, cross-commodity trading is simple once you understand the main thing that makes it work.
So, the most important factor to consider is the degree of correlation.
For example, gold and silver are part of the same precious metal group. So, they have a high degree of correlation.
Check out how to use the gold and silver ratio to properly implement the cross hedging strategy.
Final Words – Commodity Trading Strategy
In summary, all the successful strategies for commodity trading can be used to navigate the complex world of commodities. Once you understand the different types of commodities and their own cycles you can compete with the pros in this business.
Keep in mind the commodity trading tips highlighted through this guide. Unforeseeable weather patterns, natural disasters and supply and demand disruption can significantly impact the price of commodities. That is why it’s important as with any type of investment, to make sure you implement proper risk management control.
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