Decided to trade in commodities? It is not as easy as it seems at first sight. This trading has its secrets, profitable strategies, and some tricks that not everyone knows about. In this article, we will share with you all the most valuable information related to commodities trading.
Unfortunately, even knowing these secrets will not be enough if you use an uncomfortable and low-functioning trading platform. Make sure you do not make this common mistake and choose Exness Metatrader4 for your trading, and you will have all the opportunities to trade commodities and other assets profitably.
And before we share the secrets to successful commodity trading, let’s review a few basic concepts.
What is commodity trading?
It’s easy to buy currencies, stocks or other assets by trading on a stock exchange. You don’t even have to get up from your comfortable chair and go somewhere to make a purchase. But by investing in just one asset, you run the risk that sharp market fluctuations can take all of your capital.
A great way to diversify your risk is to invest in commodities. These include rice, wheat, oil, gold, coffee, cotton, corn, and so on. However, if you buy such commodities, such as rice, it does not mean that you will receive a ton of rice the next day straight to your house. Commodities are traded in futures. A futures contract is bought at a lower price and sold when the price goes up.
The benefits of commodity trading
At first glance, trading in commodities may resemble trading in any other asset, but it is not. It has its own characteristics, secrets, and, of course, its own advantages, which we will list right now:
- huge leverage. When you trade futures contracts, you will have to deposit about 10% of its value more often than not. By doing so, you can expect to make even more profit on your trading capital.
- Low commissions and low trading costs. Our company is ready to offer you trading commodities on the most favorable conditions.
- High liquidity. Unlike real estate and other illiquid assets, all money in your account, which you do not use for margin positions, is always available to you.
- Multiple profit options. With commodities, you can make money by both buying long and selling short. Unlike the stock market, there are no restrictions on them.
Essential Secrets of Commodity Trading
Right now, we are ready to share with you a few tips and secrets which will allow you to make money from commodities trading:
1. Search for your market. Many beginning traders make the mistake of trying to trade all markets at once. The more experienced ones concentrate on one particular commodity, e.g. rice or cotton, and succeed.
It is much better to learn all the specifics of one commodity and become a professional in trading that commodity rather than dilute your efforts and attention. There is even a real story of a trader who successfully traded cotton in the eighties.
However, this trader had one drawback. For some reason, he thought he could be just as successful in silver trading. As a result, instead of becoming rich, he ended each year with a loss. This story might have ended in ruin for him if, at one point, he hadn’t recognized that the only commodity he was good at trading was cotton.
Finding your market isn’t that difficult, just analyze your trades over the past six months and determine which commodities brought you the most profits. Also, remember how you felt when you were trading this or that commodity. If, for example, trading oil futures is easy for you, then why complicate your life? Just concentrate on them, and keep your profits rolling in.
2. Watch out for lingering bull and bear trends. Many commodities can go up sharply and then fall unexpectedly as well. This rule rarely applies to commodities, and as a rule, up and down phases of prices are protracted. Of course, unfavourable crop reports or other news can change the situation, but it does not happen that often. After all, if there is an oversupply in the oil market, it is not easy for companies to quickly get rid of their product. That is not a cryptocurrency that can be sold at the click of a mouse.
Just analyze the chart of oil price movements in recent years. The market was in a growth phase for a very long time, and up until 2014, the price held steady at $100 per barrel. But then the price went into a downtrend and did not rise above $40 per barrel.
The same is happening in the grain market, where prices have not risen since 2009, although the market had remained bullish until then.
Situations, where commodity prices rise or fall sharply followed by a quick reversal are extremely rare. Typically, trends hold for many years. That is why many experienced traders use trend-following strategies to trade commodities successfully. And they bring results.
The simplest commodity trading strategy which brought millions of dollars in profits
One technical analyst and trader once created a simple strategy, which brought him tremendous results. It consisted in the following: he would buy a new 10-day high and sell a short position on the new 10-day low.
This strategy brought him tremendous profits as soon as he was able to adjust it to the general trend on the daily chart.
Do you know what adjustments he made? He made it so that trade signals were accepted only in the direction of long-term trends. For example, only signals to buy a new 10-day high were accepted in a general bull trend, while signals to sell a 10-day low were ignored. When the market turned bearish, he considered sell signals when the 10-day low appeared, ignoring buy signals.
This simple adjustment allowed him to make 180% more profit than if he had used the basic strategy.
But be careful, because in day trading many commodities can exhibit high volatility. Even a slight fluctuation in price on a daily basis can look very sharp. Trader can use increase or decrease of the market to increase his profit substantially due to leverage, but such trading is associated with high risks. And before you start this kind of trading, think about whether you want to take that kind of risk.
3. Always pay attention to seasonality. Unlike many commodities, which can fall or rise sharply in value at any time of year, commodities are subject to seasonality. Take natural gas or fuel oil futures, for example. If you pay attention to the winter months, you can see that their value increases in the winter because of the high demand for them. In summer the demand is not very high and the price goes down.
In about 8 out of 10 cases these seasonal patterns work, so you will be able to follow them and be more likely to make a good decision when trading commodities. The seasonal patterns in the commodities markets were extensively studied by Jake Bernstein. This famous stock trader even wrote a book in which he described dozens of different regularities. After reading this book, you can take them on board.
A strategy of using seasonal patterns will certainly not guarantee you success 100% of the time, but it will definitely increase your chances of success compared to if you did not use them. These seasonal patterns can be an excellent indicator of whether the market is trending. And, of course, using these models will allow you to avoid major problems.
Best Commodity Trading Strategies
Before we start looking at the best strategies optimal for commodity trading, it is worth noting that some traders make the mistake of using forex and cryptocurrency strategies suitable for commodity trading. Many of them, despite their proven effectiveness, do not work in commodities trading.
Above, we have already reviewed one of the simple but effective strategies. Now we will offer you a few more exciting strategies that have proven effective for many traders.
Strategy 1. Niche trading strategy
Trying to cover as many assets as possible, traders increase the probability of making a mistake. After all, each niche and each commodity on the commodity market is unique. Strategies for gold may be totally unsuitable for oil trading, and the most effective strategy for oil trading may be meaningless when trying to trade rice and so on.
Therefore, the first strategy is to become thoroughly familiar with the characteristics of a single asset, such as gold, millet, or cotton. Concentrating on one niche will be much easier for you to learn all of its nuances. You will clearly understand what factors influence the chosen asset.
Perhaps you already have a strategy that is effective with one of the commodities. That’s fine. Then you can choose this commodity and make adjustments to this strategy as needed.
Also, decide on a time frame that you are comfortable trading. Choose long-term trading if you don’t want to constantly monitor the market and grab your heart at every price movement.
Strategy 2. Trend Trading
While some traders try to argue against the effectiveness of trend-following strategies, the fact that they work great for commodity trading is a fact. Commodity traders know better than anyone that the trend is their friend, and trading against the trend in most cases is insane.
The fact is that supply and demand have their maximum impact on commodities, leading to long-term trends, both bearish and bullish.
The following example shows that this is indeed the case. Let’s look at how oil prices have changed over the years. Let’s try to figure out why oil prices started falling so sharply in 2014.
The growth rate of the Chinese economy began to decline sharply. And it is China that is the second-largest consumer of oil in the world. Oil, which not so long ago was trading at $100 a barrel, has fallen to $26.
As a rule, any trend in commodities is long-term, but if a trader pays attention to the intraday trading, he or she will be able to notice the high volatility of some goods. Day trading of commodity futures became popular primarily due to the possibility of using large leverage.
Your strategy may be to trade on the trend, using leverage, just do so with extreme caution and with a clear understanding that you are willing to take all the risks. Otherwise, it will be better to refuse to use the leverage.
Strategy 3: Indicator Trading
This strategy can be considered as one of the best ones when trading with commodities. Of course, you can use various indicators for successful trading in commodities, but the most effective one is the CCI Commodity Channel Index. This indicator allows traders to find cyclical trends in the commodities market to use these trends as a bullish or bearish filter later on.
Unlike many other indicators, the primary function of the CCI is not to search for oversold or overbought signals. Every trader must be aware of the fact that if the CCI reading is above +100, this is a signal of strength. This indicates that the main force of the market is directed upwards.
Thus, we get an effective ready strategy, which is great for day traders. It is necessary to buy assets at the moment when the CCI indicator crosses above the +100 level. You will be able to clearly understand when to enter the market. When should you exit? As soon as the indicator makes a U-turn and goes down, it will be the best time to lock in profits.
Thus, you will not waste much effort and will be able to take only those deals, at which the indicator will move into the territory of force.
It is worth saying that it is not difficult to find one of the effective strategies for trading commodities. It is much harder to learn how to use them correctly. And, of course, it is crucial to be a disciplined trader and work hard on yourself, not giving up after every unsuccessful trade.