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What is a commodity trading strategy?

By Binomo

Jun 9, 2022

Level: Experienced

Reading time 3 min

Financial markets offer various assets for trading, including commodities. There are three key commodity categories: energy, agriculture, and metals. You don’t need to own gold bullion, barrels of oil, or bags of wheat. Commodities are traded via futures, CFDs, and mutual funds. As for any other financial instrument, historical price movements, fundamental factors, and market sentiment affect the rate of a commodity. Therefore, you are recommended to apply commodity trading strategies that will help you structure your trades. Below, you will find the best commodity trading strategies.

Indian commodity trading began in 1875 when an organized commodity trading center, i.e., the Bombay Cotton Trade Association, was founded. It was the beginning of futures trading in India.

1. Range Trading

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Don’t be surprised — the range trading strategy is one of the basic trading approaches used in any financial market.

It’s a simple commodity trading strategy, the concept of which is to trade on pullbacks from support and resistance levels. When the price rebounds from the support boundary, open a long position. If the rate goes down after a touch of the resistance level, sell the asset.

The strategy is effective for commodity trading, as the price tops and bottoms are highly influenced by the supply and demand factor. When the demand rises, the price surges to peaks. Conversely, an increase in supply and a decline in demand pull the price down.

Range trading implies the usage of channel indicators like Bollinger Bands and Alligator. Also, as the price moves up and down, you can determine oversold and overbought areas. RSI and Stochastic reflect such zones and allow opening trades on the price recovery.

Traders should remember that most commodities are highly volatile. This means that the price may go beyond support and resistance levels, leading to risks. Moreover, commodities can be oversold and overbought for a long period. Therefore, it may be difficult to define entry and exit points.

2. Fundamental trading

Commodities highly depend on fundamental factors. The commodity market is represented by various financial instruments, and there are no common factors for all of them. Before entering the market, you should learn what affects a particular asset.

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For example, if any of the world’s largest oil consumers (USA, China, and India) announce an increase in demand, crude oil prices will increase. Therefore, a trader can open a long position. Vice versa, if any of the largest oil producers signal an increase in production, the price will decline, and traders will start to sell oil.

Another example is agricultural goods. Their prices are affected by the weather factor. For instance, dryness during the summertime will lead to a reduction in wheat production. This will push the price up, as the demand will overcome the supply.

You can combine fundamental factors with technical analysis so that indicators and patterns provide signals on entry and exit points. Still, this strategy will require more time, as you will need to read the news, check economic data, and analyze their effect on the price of a particular asset.

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Summing up

The commodity market is represented by various assets. There is no single trading rule for all of them, as they differ in the degree of volatility, price factors, level of liquidity, and popularity among traders. Before entering the market, learn the features of the asset you want to trade and use a basic commodity trading strategy.