For the longest time, and even to date, in some quarters, commodities have been perceived as an unconventional exchange and investment instrument. To many, stocks and bonds remain the conventional instruments.
The commodity trading space has, over the last few years, attracted more and more investors and traders. Those who are doing really well in this space recognize that commodity trading is completely different from stock trading. A different ball game calls for learning and implementing the best strategies for thriving and making a good profit. Here is a comprehensive commodities trading guide covering what you need to know about trading in this particular instrument.
Of course, one of the areas of great interest is the strategies to employ in order to thrive in the trade and make profit. Here are a few insights from investors and traders who continue to earn big from commodity trading that will help improve your potential to make a good profit
- Know Your Commodities
It is crucial that you know the type or nature of commodities in the market before you settle on what commodities to trade in. This information will also inform your trading strategy.
One type of commodities are cyclic commodities. These are natural and dependent on the economy. For cyclic commodities, the price will go up where the supply goes down. On the other hand, are non-cyclic commodities which are generally industry dependent. The price of non-cyclic commodities goes up when the demand for the same goes up.
This is information that you can use to anticipate the direction of the trend, and make your trade to make profit and avoid any losses. Ensure that you also understand the dynamics of all the factors that affect the demand and supply of the specific commodity you are trading.
- Narrow Your Focus
The most successful among commodity traders are the ones who choose to focus on a single commodity, or at most, a narrowed down segment of commodities. If you must diversify, then it should be with commodities in the same segment such as agricultural products.
This makes a lot of sense, because you will need to do in-depth research before trading. If you have to do this research for trading in several vastly diversified commodities, chances are that you may not get it right. For one, you may have trouble keeping up with doing research for all segments. Secondly, you may end up distracted and mix up your strategies, applying to a commodity what only works for a different commodity.
- Put it all Together
It is not enough to understand the supply and demand curves of your commodities. You need to understand the logistics of the commodity market, and more so as applies to your commodity.
Know how to set up and read commodity trading charts. You should be able to deduce the best time to trade your commodities. Also important for you to understand is how to how to read, interpret and most importantly, incorporate any news about the market to your trade strategy.
An understanding of the logistics of the market will inform your shorting weaker commodities and longing the ones that are strong. The commodity market is undoubtedly different from other markets, and you must have a firm grasp of the logistics that apply to the market.
- Understand Your Commodity’s Volatility
One of the distinguishing characteristics of commodity markets is that they are as volatile as they come. Cashed on well, the volatility can translate to huge profits. On the other hand, if you are not too careful or prepared enough, you may end up with huge losses.
Before you get started with commodity trading, ensure you understand your commodity’s volatility. Succinctly put, this is the range within which the price of the commodity you are trading in will move.
The fundamental tip here is for you to take your positions and determine the size of your lot based on the volatility of the commodity. Many traders make the mistake of going with just the margin requirement when the primary focus should be on the volatility of the commodity.
- Know the Specific Tips for the Commodity
Each commodity is different. For agricultural products, for example, you need to pay attention to the demand and supply forces, as these are the key determinants of the price. On the other hand, commodities such as oil will depend more on the inflation.
It is crucial that you understand the price relationship of each commodity. More than anything, you need to study what has worked for others in the same market. Get insider insights on the specific tips that work for the commodity you wish to trade.
Commodity trading is big and getting bigger as more traders and investors get into the market. You can increase your potential to earn a good profit with the tried and tested tips outlined above.