Commodity Trading Strategies

The commodity options and futures markets provide many opportunities to gain profits from movements in price. However, more success is typically achieved through using trading strategies that have already been tested.

There are many strategies for commodity trading. Some have undergone rigorous testing while others were developed by experienced traders. For beginners, it’s a good idea to research this market, gain an understanding of the basic products used for trading, and test a few of the basic strategies well before putting your hard-earned capital at risk.

Many commodities trading techniques use moving averages, technical analysis, and various other metrics to decide whether to exit or enter a position.

Range trading is focused on purchasing when the price is at a bottom range and then selling when the price reaches the top. But this strategy can be difficult to time in the correct manner.

Buying, or breakout trading just before the price shoots up and then selling just before it dramatically drops, is ideal for the markets that are associated with stronger trends.

Fundamental trading strategies are more reliant on fundamentals in the market rather than technical trading aspects to decide whether to sell or buy.

The Best Place to Start

Reading commodity newsletters and watching the news on finances for currency trading tips could be a great place to get started. These are resources that offer traders informative information on the current market environment along with skills and tips on how to succeed when trading with commodities. Finding the correct platform for market trading is also one of the basics for beginner commodity traders.  One of the best platforms to get an online education about commodity trading is USA Futures, they offer a wealth of information for beginner traders.

Listed below are the more well-known strategies for commodity trading that beginner traders may want to try. These strategies along with several others rely on deploying “technical analysis” that will track moving averages, price movements, and other types of technical metrics which are identified by using technical charting platforms.

Technical metrics and technical analysis create the foundation for just about all the different trading strategies since they assist with providing alerts regarding when traders should exit or enter a position. Each trading strategy has its method when it comes to incorporating technical indicators along with guidance on the training that it provides.

It is important to know that strategy frameworks offer specific types of guidance that could be used in combination with one or more other strategies to achieve the most thorough analysis when it comes to making decisions. Accounting for all these factors will usually generate better results, yet this can result in more complexity, which is why many traders opt to only use one or perhaps two of the main signals.

#1 Range Trading

This strategy is utilized across all financial market trading types. It is often built around Bollinger Bands or other types of channel charting with resistance levels and the ones that the graphs support. Range trading strategies involve buying at “the support level” when the prices are in the lower range, followed by selling at “the resistance level” once the prices reach the higher ranges.

Tops and bottoms are influenced heavily by trading demand and supply. Commodity prices typically approach a peak as soon as demand drives the price to new highs. This high will level off once traders feel these prices have maxed out, which creates the assumption for the price to fall.

On the other hand, prices can also fall to the lower or bottom ranges once traders start selling, which causes the supply to increase. Oversold territory or overselling is something of importance to understand in association with watching the lower range since this a term that means the commodity’s market price has fallen below the estimated value, which means it is likely for a rebound to occur.

In summary, there are usually numerous indicators to use when you watch for oversold and overbought territory. Other than making use of channel-range charting, lots of traders also use stochastics, relative strength index, rate of change, and momentum. These are helpful indicators when obvious trends are difficult to identify.

Range trading strategies are often successful, yet it does come with a few caveats. The markets can remain in oversold or overbought territory for a long period which can make it harder to decide on the best timing for exit or entry. Also, resistance and support levels are just estimations. When you use range trading, you need to be aware of the risks that the price of commodities may move past the expected resistance or support level.

You can also buy charts that represent the gold price ranges for selling and buying.

#2 Breakouts

Breakout strategies seek to capitalize on short-term movements. Traders that use breakout strategies look to gain profits from buying directly before the price of the commodity moves dramatically higher or they sell directly before the prices move significantly lower.

A breakout strategy is useful when range-trading with the specified resistance and support levels, yet they aren’t just limited to resistance and support level ranges. Breakouts might occur unexpectedly. Identifying breakouts can help traders to profit when the price moves substantially lower or higher.

The ideology behind trading breakouts appears to be relatively simple. Markets cant continue a trend without creating new lows or new highs. This is a strategy that works better when the trends are long-lasting and strong. Regardless of whether the trend is down or up, traders are buying at new highs, while selling at the new lows. One of the important cautions about this approach is that it will perform poorly if the markets aren’t able to secure short-term, strong trends.

#3 Fundamental Trading

This is a strategy that relies on fundamental and technical indicators. Fundamental trading techniques look at the market fundamentals which are typically based on market factors that are idiosyncratic rather than technical-trading dynamics.

As an example, a trader may purchase soybeans since the summertime weather is dry leading to an expectation that the demand will increase from smaller supplies of this harvested crop. Another example may include the demand and supply of oil. If China had to announce that its demands for oil have increased, it would be expected that the price would increase, allowing traders to seek long positions and benefit from breakouts from the news.

One challenge surrounding fundamental trading techniques is that more time is needed for research. In many cases, watching out for a technical chart pattern could be far easier than trying to number crunch to develop a fundamental forecast. More importantly, fundamental positions might require more patience and time over a longer term while the technical patterns might provide much faster gains if identified accurately.

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