Commodities, whether they are related to food, energy or metals, are a vital part of everyday life. Anyone who drives a car can be significantly affected by high crude oil prices. Anyone who eats might feel the effect of a drought on the soybean supply.
Similarly, commodities can be an important way to diversify a portfolio beyond traditional securities – either for the long term or as a place to park cash during unusually volatile or bearish stock markets.
History of Commodities Trading
Actually, commodities trading is an old, old profession – far older than trading stocks and bonds.
Ancient civilizations traded a wide collection of commodities, from seashells to spices. Commodity trading was an essential business. The might of empires can be viewed as somewhat balanced to their ability to create and manage complex
trading systems and facilitate commodity exchange as these served as the wheels of commerce, economic development, and taxation for a kingdom’s treasuries.
Where to Trade?
Although many have merged or gone out of business, there are still multitudes of commodities exchanges around the world. Most carry a few different commodities, though some specialize in a single group. Commodity trading in the exchanges can require agreed-upon standards so that trades can be executed (without visual inspection).
See Also: Checking On Your Trading Goals
Types of Commodities
Today, tradeable commodities fall into four categories. They include:
- Metals (including gold, silver, platinum, and copper)
- Energy (including crude oil, heating oil, natural gas and gasoline)
- Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)
- Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar)
How to Invest in Commodities Futures?
A popular way to invest in commodities is through a futures contract, which is an agreement to buy or sell, in the future, a specific quantity of a commodity at a specific price. Futures are available in every category of commodity.
Types of Commodities Trading Strategies
Commodity trading strategies are plans for buying and selling commodity futures and options to earn profit from movements in price. It is important to construct a strategic plan before you begin trading commodities and risk any capital.
Each type of strategy has pros and cons, so it is up to the individual trader to choose which type of strategy might work best.
See Also: Common Active Trading Strategies
1. Range Trading Strategy
Range trading in commodities simply means trying to make purchases near the bottom end of a range (support) and selling at the top of that range (resistance).
The success of this strategy depends on the ability to buy a commodity after selling makes the price fall to an oversold condition. Oversold means that the market has absorbed all selling and buying is likely to emerge. On the other hand, one might look to sell a commodity after a long rally that makes the price rise to an overbought condition where the buying declines and selling emerges.
2. Trading Breakouts
A strategy centered on trading breakouts in the world of commodities means that a trader will look to buy a commodity as it makes new highs or sells a commodity as it makes new lows. New highs and lows can easily be spotted on a chart, as they are the peaks and troughs of previous moves.
Fundamental Trading Strategy
While trading breakouts or ranges usually have specific rules as to when to buy and sell, fundamental trading depends on factors that will affect supply and demand for the commodity in question.
As an example, a trader might buy soybeans because the weather is dry during the summertime leading to expectations for a smaller crop. On the other hand, one might expect demand to increase for crude oil from China, leading to a long position in oil futures.
There are a variety of commodity investments for novice and experienced traders to consider. Although commodity futures contracts provide the most direct way to participate in price movements, other types of investments with varying risk and investment profiles also provide opportunities.
See Also: Benefits of Commodity Investments
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