Who does not want Tips? If you are a commodity trading, Commodity trading tips are super-duper important for you, especially if you are at a beginner level. Well, we will talk about 9 such tips in this review so that we get an idea on what aspects to take care of, at what severity level.
But, first, let’s quickly go through some basics.
Commodity Trading involves trading of various commodities like metals, spices, energy and livestock over the specific commodity exchanges (also read: Top Commodities). In many forms, commodity trading is basically similar to any other form of trading, however, it has a slightly different tinge to it as compared to the more traditional ways of trading.
The reason for the difference is that the prices of commodities are more easily and more quickly affected by the changes in demand and supply as compared to the price of stocks and other trade forms. It is also observed that certain factors that may not affect the prices of stocks or bonds have a strong impact on the prices of commodities.
Therefore, commodities are more subject to price movements than other traditional methods and hence the volatility is higher. The high volatility can be considered a good thing as it gives the traders ample opportunities to enter and exit the market and cash in on the price movements. Having said that, the risks are higher too.
Thus, trading in commodities is quite different from trading in stocks or real-estate or options. At the same time, each commodity has its unique characteristics that have to be kept in mind while trading in that particular commodity. The rules that work for oil may not be suitable for gold and the ones for trading coffee may be altogether different.
“So, it is important for the new traders to follow the commodity trading tips that are mostly formulated by the experts in the field or the seasoned traders.
It is also to be kept in mind that the commodity trading tips that worked for one trader may also differ for another trader because of individual trading style, personal goals and objectives and the ability to take risks.”
Top Commodity Trading Tips
In general, the following are the top 9 commodity trading tips that should be kept in mind and executed to get optimum outcomes for a commodity trade:
Commodity Trading Tip#1
Do not enter Commodity Trading with Stock Market Trading ideas:
One of the most important commodity trading tips is to understand that commodity trading is different from other forms of trading. For instance, intraday trading tricks may work for stock trading but those may not work for commodity trading.
The factors influencing the prices of stocks are quite different from the factors affecting the price of commodities and this must be kept in mind.
Also, the ways of profit management and risk management differ in these forms of trading. It is to be noticed that both share market and commodity market are speculative in nature but they generally have opposite trading patterns and thumb rules.
Commodity Trading Tip#2
Diversify capital in Different Commodities:
Diversification is one of the most useful commodity trading tips. Risks are bound to happen even for a seasoned and careful trader. So, it is necessary for the commodity traders to keep a good proportion of rewards and risks by not keeping all the eggs in the same basket.
It is advisable to diversify the capital into different commodities so that even if one of the markets does not go in the anticipated direction, the trader still has the options to protect his capital. Therefore, it is ideal for the commodity traders to take positions keeping in mind the risks involved with a specific commodity and balance his trades.
Commodity Trading Tip#3
Understand the logistics:
A big mistake that a trader can do is to enter the commodity market unprepared and unaware. To counter these effects, one of the most crucial commodity trading tips is to understand the logistics of the commodity market which vary from the other markets.
The trader must understand the best time frames to trade commodities, how to read and incorporate the news into his trade and how to set up and read the charts specific to commodity trading. For example, when setting up and reading charts for commodities, average trading price (ATP) is a critical element and must be applied to the charts.
Another one of the important commodity trading tips and tricks related to logistics is too long the strong commodities and short the weak commodities.
Thus, understanding the logistics of the commodity market become all the more important for a sensible trader.
Commodity Trading Tip#4
Use specific technical analysis methods:
One of the expert commodity trading tips is to use specific technical indicators for commodity trading, which are not the same as stock trading. As discussed, the average trading price forms a very crucial part of commodity trading. ATP serves as the support level for strong commodities and as the resistance level for weak commodities.
Certain ATP specific strategies can be used while trading commodities, such as ATP Crossover, which means that when a strong commodity shows reversal and breaks ATP as support it can be sold, and similarly, when a weak commodity shows reversal and breaks ATP as the resistance level, it can be bought at that level.
Another commodity specific trick is to put double stop loss orders. By doing so, when the stop loss is reached, with half the quantity the open position will square off and with the other half profit can be made that will help to recover loss due to hit stop loss.
Commodity Trading Tip#5
Understand the difference between Cyclic and Non-cyclic commodities:
One of the very specific commodity trading tips is to understand the difference between cyclic and non-cyclic commodities and trade accordingly. It is to be learnt that cyclic commodities are natural and economy dependent and for them when the supply goes down the price goes up.
Similarly, the non-cyclic commodities are industry dependent and their price goes up as the demand goes up.
So, the trick is to correlate the price of the commodity with the domestic currency and once the trend is identified and correlation is done, a successful trade can be initiated. A commodity trader must have sound knowledge of the nature of the commodity he is trading in, in order to anticipate the correct direction of the trend, make profits and avoid losses.
Commodity Trading Tip#6
Volatility trick in Commodity trading:
The volatility of commodity markets is unmatched.
It is like wildfire which can burn out all profits, but at the same time, if this volatility is cashed on well, it can reap huge profits as well. So, one of the commodity trading tips and tricks that helps the most to survive the volatile commodity markets is to know that each commodity has a different type of volatility, which is the range within which price of that commodity generally moves.
So the trick is for the trader to take positions and determine lot sizes based on the volatility of the commodity and not necessarily the margin requirement, which is mostly done.
The trader must take bigger positions in commodities with low volatility like gold, oil and smaller positions in commodities with high volatility like copper, and agricultural products.
Commodity Trading Tip#7
Study the markets and take bullish or bearish positions accordingly:
Another one of the expert level commodity trading tips is to analyse the commodity market and take positions accordingly.
For instance, the best time to buy a commodity is when the market changes from normal to bullish and at this time the trader must hold stop loss for positions that are below the support level; these long positions should be squared off when the market goes back to neutral.
Similarly, when the market becomes bearish it is the time to sell and at this status, the trader must hold resistance on short positions with stop-loss; these positions must be squared off again when the market reaches neutral state.
Commodity Trading Tip#8
Follow tips and tricks specific to each commodity:
The best of the commodity trading tips and tricks is to know each commodity specifically. Each commodity has unique features and these features determine how that commodity must be traded.
For example, for agricultural commodities, demand and supply are the most important factors, whereas, for commodities like oil, inflation becomes a price determinant.
For commodities like gold and oil, variations in currency prices plays the most significant role in price determination and many commodities are affected by the global data flow like production data, manufacturing data etc. Keeping this in mind, there are specific strategies for different commodities.
As an example, the World Gold Council predicts that the demand for gold will not up much in the near future. However, since the prices of gold are affected by many other factors, it is to be considered that due to tensions in North Korea, volatility in the Middle East and differences between the US and Germany, gold will turn out to be a safe haven and demand will rise.
Thus, the specifics of each commodity must be understood to understand the actual price relationships.
Commodity Trading Tip#9
Follow the basic rules of trading:
In the end, the most basic but one of the most important commodity trading tips is to follow the basic rules of trading. A commodity trader, like any other trader, must not overtrade. He must attempt to make only as many trades and for as much amount as he can afford to lose.
All attempts must be made to keep the capital intact and all methods of risk management like stop loss must be effectively used.
Therefore, by following the commodity trading tips and tricks, a trader can make commodity trading very rewarding for him. At every step, care must be taken to choose methods and strategies that suit his personal goals and objectives and he must be very clear of the unique features of commodity trading in order to be able to cash on them.
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