Finance

Strategies For Commodity Trading

Strategies for commodity trading

Before starting with the strategies for commodity trading let us first know about what are the types of the commodity are and who the participants of the commodity market are.

A commodity is any material thing that one can buy or sold through commodity exchange. Commodities are of two types: soft commodities and hard commodities.

Soft commodities are the primary sector products like live stocks, foods, crops etc. And hard commodities are like oil and metals.

A commodity market consists of hedgers, arbitrator and speculators, the hedgers, are those who produce materials or cultivate crops like farmers. And the speculators are those who anticipate the market fluctuations and do buy or sell business accordingly. And the arbitrator is the commodity exchange itself.

This buying and selling on a global level are done through commodity exchange, and the stocks or commodities are brought through the dematerialization process, which requires a Demat account.

Commodity trading strategies – To make good profits in commodity trading, one should follow below-mentioned techniques.

  • Choose your niche – choosing among the commodities you want to trade. And choose wisely and seasoned niche. I.e. as the prices commodities are subject to change according to buyers and sellers. 

  • Suppose we want to trade in wheat then the costs of grain goes up during summer and face a downfall during winters so buy in accordance with seasoned demand and the supply availability likewise.

  • Breakout trading strategy for commodity trading - break out is a point where we can see the shift in the trend. The shift means the upward or downward movement in the buy and sells trend from the support and resistance levels. One should buy or sell commodities when the prices are going to cross these levels.

One can go for long if the prices are breaking out from resistance level signifying a bullish trend or the market and likewise, he set his selling goals if the costs are going to fall below support level resulting in a bearish market.

  • Follow option trading strategies in commodities – Buying and selling of commodities as future options hedges the risks associated with natural disasters. 

  • Future options work as a contract just like in stocks that promise to pay the predefined price among the two parties at a future date on delivery. This saves the interests of both the hedger and the speculator.

  • Do the fundamental analysis before you choose - Fundamental analysis is a must before you venture into any commodity trading? Here it means that one has to do comprehensive research of a commodity`s production scope and buyers base to sell the purchased lot.

In this course, let’s take an example. When we invest in commodity thinking of its mass production for a particular year, and if this holds true, the prices of wheat will decrease in the near future markets. So one may get a loss when there is low demand. The converse is also true.

  • Scalping in commodity markets - This strategy works perfectly in commodity exchange as the demand and supply of commodities changes according to market sentiments like political events, tax, environmental effects etc.

So, scalping means earning small profits in short spans instead of investing for long planning to gain long and heavy gains. Scalping is profitable when made with direct-access-broker instead of the regular service broker.

  • Use volatility as a profit-making statement – Commodities are the most volatile trading instrument. No one can speculate when the prices are going to soar or when the commodities are going to be discarded from the buyer's choice.

One can use the real-time charts to find the breakout point and plan to enter and exit strategy in light of the volatility factor.