Commodities trading requires strong analysis of a number of factors. Traders need to take political, economic, and trade news into account before making decisions. But one person cannot keep up with everything happening at one time. We need smart strategies when it comes to trading commodities in your limited time.
These are the best trading strategies for trading commodities.
Buy low, sell high
Obvious? Of course. What is not obvious, however, is what constitutes a high or low price. You need a strategy to analyze the price of a commodity. The most important factor is timeframe. A commodity that appears cheap might become expensive in the long term.
But what constitutes short term and long term? A short term trend can be days to weeks. A long term trend can last months to years. When you analyze charts, you need to see if the price is near the top or bottom of the range – if it is, it might be a good time to buy or sell.
Following the trend is often the best course of action. While short term trends can be appealing, it is generally the long term trends that have significance.
Knowing when to take profits
Commodity traders can often struggle with when to take profits on their trades. Some skittish traders take profits too soon, and those overly ambitious stay for too long until their profits turn into losses. You need a strategy to know when to take profits.
The first thing to consider is that you’ll never get it exactly right. Prices change constantly, and the highest peak or lowest dip might last for seconds. Even if you’re alert enough to recognize these moments, you might struggle to get your trade in. Therefore, don’t beat yourself up on not making the highest profits possible.
The second consideration is that you need a consistent strategy to make consistent profits. Without a set idea of when to take profits, you are crawling in the dark. Instead of being able to sit back and let your strategy work for you, you’ll be frantically trying to get the “most” out of every trade. Not only is it exhausting, it will inevitably cause you to make mistakes.
One popular strategy among commodity traders is to trade spreads. This means you’re simultaneously buying one commodity and selling the same or a similar commodity. It lowers the risk of making one clear cut decision.
The idea is that when one commodity goes up, a similar commodity will go down. Demand for corn, for example, might indicate a lower demand for wheat.
Spreads can also be taken with the same commodity over a certain timeframe. A trader can buy a “July” commodity and sell the same “December” commodity at the same time.
The importance of strategy
Commodity trading requires strong strategy work. Without it, you will end up making mistakes that could have been avoided with a bit of planning. It is a good idea to educate yourself on strategy before joining the markets, as expertise in working with the data is what will give you the edge.