4 Successful Commodity Trading Strategies | Espresso

Successful Commodity Trading Strategies

There is an old saying that one should not put all their eggs in one basket. Smart traders do not invest all their money in the same trade instead diversify their portfolio. Diversification will help you increase your reward ratio and reduce your risk.

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Traders who trade stock and bond markets typically choose the commodity world as an important diversification tool.

Commodity Trading in India

Commodity trading has gained momentum over the past few years. New investors entering the market commonly mistake the commodity market as a "simple thing" to trade for profit. But this is not true.

The commodity market is highly volatile, and the development of the commodity market requires a lot of knowledge and experience. However, having experience and knowledge does not guarantee profits.

Traders enter the commodity world to diversify and profit but usually exit immediately after recording recurring losses. The problem is that people usually choose trades based on their emotions. This is one of the main causes of recurring daily trade losses. Commodity trading is not rocket science but requires detailed knowledge and study of the market.

If you are planning to trade commodities, it's necessary to know that trade wars have triggered a new paradigm shift in what drives commodity prices. Trade wars are a relevant underlying topic that opens the door to new opportunities in commodity markets. For instance, the trade war between the US and China put a lot of pressure on the financial system, increasing intraday volatility.

In this blog, we will reveal some of the best-kept secrets of commodity trading, known only to successful traders, helping you buy and sell commodities in the commodity market.

Robust Commodity Trading Strategies Delivering Results

  • Find your niche commodity market

Most renowned commodity traders specialise in trading one commodity: cotton, gold, oil, or wheat.  Each of these markets is different. You need to master a single market and find a niche. Explore and learn all the features of a niche product. This is the first step to building a successful commodity trading strategy.
Also Read: Trading Oil as a Commodity

To find your market, you need to understand the market you trade more confidently.

For example, if you have a better understanding of the price movement in the gold market, you will be better off becoming a gold trader. However, if your commodities strategy yields the best results in the coffee market, you are better off being a coffee trader.

  • Trend-following commodity strategy

Trend-following strategies generally work well in commodity markets. Your chances of prosperity are always higher when the trend is on your side. The golden rule for trading is to follow the trend simply.

The price of commodities is determined by the laws of demand and supply. The interaction of demand and supply can lead to bearish and bullish trends. Product trends are inherently strong and permanent when the forces of supply and demand are in action.

  • Limit your focus

Limiting your focus is important to achieve consistent long-term returns from your product. To be a successful commodity trader, you need to focus on one commodity or a specific part of a commodity, such as an agricultural product. This is also one of the powerful commodity trading strategies that require patience. 

To trade in a particular commodity, you should conduct comprehensive product research. You need to study your product and past market trends. If you are trading in two highly diversified commodities like oil and silver, you can be distracted from both. 

Nevertheless, if you need to diversify in one product, you can trade other products in the same region. For instance, soy and wheat are two commodities in the same sector, so a little knowledge of one sector can be used in another.

  • Scalping strategy

Scalping is the process of profiting from small price movements. 

The scalper makes small gains with small changes and exits before the losses offset the gains. In scalping, you increase the number of successful trades while reducing your profit per trade. Traders can usually win about half their trades if the winnings are much larger than their losses. However, if you are good at scalping, you will have a high win/loss rate depending on the number of trades.

However, the winning amount is equal to or slightly larger than the loss amount. Therefore, a scalping strategy is one of the most profitable commodities trading strategies, eliminating the risk of adverse events because it interacts with the market for a very short period.

Conclusion

Learning about successful commodity trading strategies can help you navigate current volatility and manage ongoing bullish and bearish trends. However, being a seasoned commodity trader requires more than a commodity strategy. It takes discipline and hard work. One of the major obstacles commodity traders face today is the trade war between the United States and China.
Also Read: Commodity Trading vs Forex Trading

The ongoing trade war between the US and China has already been a catalyst for increasing intraday volatility. However, with the best intraday commodities trading strategies, anyone can become an agile trader and take complete advantage of intraday volatility.

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Frequently Asked Questions

For trading in commodities, you need to follow these strategies to incur profit -

  • Research about the economic factors that define the price of commodities.
  • Mitigate your risks by trading in diversified assets. Also, you should know where to put the stop-loss orders.
  • Create a demo account with the help of your broker and practice trading to test your trading strategies.

Commodity trading offers many advantages. We will highlight three main advantages of trading commodities.

  • First, it helps diversify people’s portfolios and involves real assets in their wealth creation system.
  • Second, commodity assets are easily understandable in demand and supply equations. Imbalances in demand and supply can lead to real price fluctuations in commodity markets.
  • Finally, inflation makes money less valuable when an economy goes into recession. However, commodity prices rise during periods of high inflation and are considered a hedge.

Different market participants can be distinguished in the commodity market. Market participants are generally split into the following categories:

  • Hedgers
  • Speculators
  • Arbitrage

Commodities are tangible assets with a physical value in the financial markets. Raw materials that people generally use in their daily lives are commodities. For example, people use energy resources to support themselves, agricultural products to feed their families, and metals to make tools.

Commodities can further be categorised into two different types: Soft and Hard. Soft commodities include cotton, wheat, coffee, sugar, and cocoa. On the other hand, Hard commodities include oil, silver, and gold.