The futures and options markets offer many opportunities to capitalize on price movements. However, greater success is usually achieved through the use of tried-and-true trading strategies.
A Good Place to Start
Watching financial news and reading newsletters about commodities for the latest trading tips can be a good place to start. These resources provide traders with information about the market environment as well as tips and skills for success in commodity trading. Finding the right market trading platform is also essential for beginners in commodity trading.
Range Trading
Range trading is a strategy used in all types of financial market trading. It is often built around Bollinger Bands or any other chart that plots support and resistance levels. The range trading strategy involves buying at the support level when prices are at the bottom of the range and selling at the resistance level when prices are at the top of the range.
Bottoms and tops are greatly influenced by supply and demand in trading. Commodity prices typically approach their peak when demand pushes prices to a new high level. This level is reached when traders feel that prices have peaked, creating an expectation for a decline.
Conversely, prices drop to the bottom of the range when traders sell and supply increases. Overbought or oversold areas can be significant to understand when monitoring the lower range, as these terms indicate that the market price of the commodity is below its estimated value with the potential for a rebound.
Overall, many indicators can be used when monitoring overbought and oversold areas. In addition to using a channel range chart, many traders also use the Relative Strength Index, stochastic indicators, momentum, and the rate of change. These indicators can be helpful when it is difficult to identify clear trends.
The range trading strategy can be very successful, but it also comes with some caution. Markets can remain in overbought or oversold areas for extended periods, making it difficult to determine the right timing for entry or exit. Additionally, support and resistance levels are just estimates. When using range trading, there is always the risk that the price of the commodity will move beyond the expected support or resistance levels.
The chart below illustrates the price ranges for buying and selling gold.
Range Breakout
The range breakout strategy seeks to capitalize on short-term movements. A trader using the range breakout strategy will attempt to benefit from buying before the commodity price rises significantly or selling before it falls significantly.
Breakout strategies can be used when trading ranges with defined support and resistance levels, but they are not limited to just those levels. Breakouts can happen at any time. Identifying a breakout can help traders capitalize on significant price movements either upward or downward.
The philosophy of breakout trading is relatively simple. The market cannot continue in its direction without making new highs or lows. This strategy works best when trends are strong and long-lasting. It doesn’t matter whether the trend is upward or downward, as the trader buys new highs and sells new lows. The critical caveat for this strategy is that it performs poorly when the market fails to establish strong and short-term trends.
Fundamental Trading
The fundamental trading strategy is one that can depend on both technical and fundamental indicators. Fundamental trading strategies are based on market fundamentals that generally rely on specific market factors rather than technical trading dynamics.
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For example, a trader may buy soybeans because the weather is dry during the summer, resulting in an expected increase in demand from smaller harvest supplies. Another example could include the actual supply and demand for oil. If China announces an increase in its demand for oil, prices are expected to rise, and traders may seek to take a long position to benefit from the news breakout.
One of the challenges facing fundamental trading strategies is that they may require more time for research. Often, monitoring technical chart patterns can be much easier than performing the calculations to develop fundamental forecasts. Moreover, fundamental positions may require more time and patience for the long term, while accurately identifying technical patterns can provide quicker gains.
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Source: https://www.thebalancemoney.com/types-of-commodity-trading-strategies-809357
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