Farmers use commodity trading to lock in favourable prices prior to
an ensuing harvest. Hence, there are real commercial reasons for
trading in commodities. However, they are also traded for pure
speculation by private traders seeking to make a commodity trading
profit by speculating in the price movement over their chosen
timeframe.
More than any other type of speculation, such as forex or
stock
trading, commodity markets involve a very high degree of
seasonality. Hence, it is important that the trader be very aware of
the underlying cycles affecting the market in question.
That said, commodity trading can be done successfully by giving a
very high degree of emphasis to the price charts alone. The
commodities trade extremely well according to technical analysis
methods. For example, Fibonacci price retracements and time cycle
analysis work extremely well on commodity charts. So too do other
technical indicators such as moving averages, price gaps, support
and resistance points, trendlines and so on.
Trading commodities can be an extremely volatile and unpredictable
business because these markets are known for their sudden and sustained price
surges and collapses. Compare a long-term commodity chart of
something like soybeans or oil to any stock index and you will see
the difference. Hence, it is vital in commodity trading that you are
extremely disciplined in your approach and employ strict money
management rules. A good stop loss order, placed in the market at
the time you place your trade, is a must.
Traders also play the spreads between commodities, which is an
extremely popular form of commodity trading, and which effectively
multiplies the range of profit opportunities hugely. Examples of
spreads is the wheat-corn spread, where traders speculate on
the relative price of one to the other. Other spread
opportunities occur in the price differentials between different
delivery months of the same commodities' futures contracts. Hence,
you might buy the contract nearer to expiration and sell the one
further out with the expectation that long-term prices of that
commodity will fall with respect to near term prices.
Once you also realize that there are active
options contracts in all
the major instruments, it becomes clear that commodity trading is a
very desirable niche within the universe of speculation.
As with all forms of trading, mental and financial discipline are
key factors to success in commodity trading. Given their
extreme volatility, it is paramount that you have a proven method
before you ever speculate a single dollar in these often
unpredictable markets.
You must also remember that these are real physical products
involved, and they can literally be delivered if you fail to close
out your position before the expiry of the commodity future or
option contract. Otherwise, it can result in a truck pulling up
outside your house with your delivery of soybeans, live cattle or
cocoa - depending on what you have been trading. This has been known
to happen!
That said, the opportunities present in
commodity trading are huge and exciting. These are markets
that see some real action, and you also have the pleasure of knowing that you are trading in real world
items, which can give your trading a whole new meaning.
