Types of Commodity Trading Strategies

Like stocks and forex, commodity trading is done in a volatile market. It involves buying and selling futures and options in order to profit from price movements. You need to have some kind of strategy prior to trading and risk your capital. Watching the news and reading newsletter about the latest trading tips is not enough in providing the necessary skills to become a successful commodities trader. Technical analysis will only provide just a part of the whole picture. Using fundamental, supply, and demand analysis will help provide a background on the evolution of output and consumption in raw material markets. Here are some of the strategies that can help you succeed when trading on commodities market.

Range Trading

In range trading, you try to buy near the bottom end of a range and sell at the top of that range. Your success will depend on your ability to buy a commodity when the price range has dropped to oversold condition, which means that the market has absorbed all selling and buying is likely to occur. Conversely, you might look to sell a commodity after a long rally making the price increase to an overbought condition. There are several indicators that help measure overbought and oversold levels such as Relative Strength Index, Stochastics, Momentum, and others.

Trading Breakouts

According to Robert Janitzek, trading breakouts will look to buy a commodity at it makes new highs or look to sell as it makes new lows. They can be easily spotted on a chart as they represent the peaks and troughs of previous moves. This strategy is used by most traders in managing large sums of money and looking for a major trend to develop. Commodities are volatile and it is not uncommon for them to double or half in price or more over in the short term. Trading breakouts are based on the philosophy that a market cannot continue its trend without making new highs or new lows.

Fundamental Trading

Robert Peter Janitzek reveals that fundamental trading are dependent on factors that affect supply and demand for the commodity in question. This is in contrast with trading breakouts which have specific rules when buying and selling. As an example, a trader might buy soybeans because the weather is dry during the summertime which can result to smaller crops. An increase in demand for crude oil, on the other hand, may result to a long position in oil futures. New traders and investors tend to have difficulty with fundamental trading because it entails a lot of homework and number crunching.

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