Purchasing and selling actual commodities or futures contracts is known as commodity trading. It allows users to predict commodity prices without acquiring the underlying assets. Commodity markets enable the exchange of a vast array of commodities, encompassing agricultural goods like wheat, corn, and soybeans, energy resources like natural gas and crude oil, metals like gold, silver, and copper, and more.
Strategies for Commodity Trading
Here are some of the best strategies for commodity trading in an evolving market.
Similar to other markets, trends in commodities form when they consistently rise to greater highs or fall to lower lows. Traders using a trend-following commodity strategy will want to profit from these market moves. The idea is to exit the market before or soon after the movement reverses and profit from the body of the trend.
The goal of range trading methods is to profit from a commodity that is under consolidation. It is useful in a market that does not break out to new highs or lows but instead stays inside support and resistance lines. Knowing when to enter an overbought or oversold position in a commodity is essential to a successful range trading technique.
The Commodity Channel Index (CCI), the relative strength index, stochastics, and the momentum indicator are used as range trading indicators. The overbought and oversold signals that these indicators confirm suggest the support and resistance levels.
Using breakout trading is a popular method to profit from short-term commodity moves. It entails taking a position right before a significant increase or decrease in the market. You would only trade the initial movement in the market instead of the body of trends like in the trend-following strategy.
False breakouts, or “fakeouts,” are significant risks in commodity breakout trading. As a result of the extreme volatility of commodities, it is occasionally possible to break through support and resistance levels without seeing a strong price increase. False breakouts happen when the market reverses as fast as it broke out due to the purchasing or selling pressure swiftly wearing off.
You can trade commodities using these strategies on a good trading account that offers the necessary features to implement them.
Commodity Trading Tips
The following are some handy tips to trade commodities.
Trade on Volatility
Changes in the weather, labour disputes, geopolitical unrest, monetary policy, currency value, etc, may cause volatility. This always provides a chance to profit. The primary emphasis of your fundamental research should be market sentiment. You should be able to predict shifts in supply and demand. It’s also necessary to understand how to apply leverage properly. It’s always advisable to start with low leverage amounts.
Observe Seasonal Characteristics
Along with long-term patterns, seasonal aspects also impact several commodities. Swing and position traders choose to follow the shifting trends throughout time. On the other hand, traders with a short-term approach rely on volatility. Because of this, seasoned traders frequently claim that position trading is the most beneficial strategy. You can also earn significant returns if day trading is your preferred strategy and you don’t fear volatility.
For entry and exit, you should always go for technical analysis. The 200-Day Moving Average is a helpful tool for identifying emerging longer-term trends. The Commodity Channel Index is an additional useful indicator for identifying overbought and oversold circumstances (CCI). Finally, you may use Fibonacci analysis tools to help your trading methods by seeing significant levels of support and resistance.
Follow the Trends
The most reliable trading techniques are those that follow trends. Be patient, find trend confirmation, and ride the wave. Demand and supply factors can fluctuate depending on an economy’s health, the currency value, the amount of capital spent by manufacturers, changes in commodity stockpiles, production levels, and weather forecasts. So, they drive the trends.
Monitor the Size of Your Position
Another important factor is position sizing. You should never take too much risk with your position. However, there are occasions when you can increase the size of your position. Investing in a basket of commodities may be the best option if you are uncomfortable trading only one or two commodities. The objective is to constantly make “net” gains over time, regardless of your decisions.
Commodities trading provides an opportunity for investors to take part in the global economy. You can open a demat account and trade commodities on demat apps like Kotak Neo. To successfully participate in this dynamic market, one must thoroughly understand effective trading techniques, risks, and market trends. You must specialised trading hours, such as commodities trading time in India. By carefully considering the price volatility, supply and demand dynamics, geopolitical events, and developing trends, traders may confidently traverse the complicated world of commodities trading and make well-informed judgements. Recall that the keys to success in commodities trading are disciplined execution, ongoing learning, and risk management.