Best Trading Method for Commodities
What Is the Best Trading Method for Commodities?
Commodities are daily-use items such as wheat, corn, gold, silver, oil, or natural gas. Global economic factors result in the price fluctuations of these commodities. Therefore, traders use future contracts to make profits from a price change. The best trading method for commodities is range trading.
In the range trading strategy, you work according to the highs and lows of the Bollinger Bands. When the price is low, you buy the commodities and vice versa. This strategy pays off highly in futures contracts. The futures contract is the bet you place on the future price of the commodities.
You can predict the trend of the price fluctuation of a commodity in the Bollinger Bands. After that, you can purchase or sell a futures contract. This is a technical strategy as it involves going through the technical data of price trends. The pros of this trading strategy are as follows:
- It requires lesser research as you are only following the channel charts.
- The range trading methodology will provide higher ROI if you have predicted efficiently in future contracts.
- You can execute this strategy successfully by analyzing the contents of the CCI (Commodity Channel Index).
How Is Commodity Trading Poles Apart from Stocks and Bonds?
Stocks and bonds are the virtual assets that an investor manages. These assets are not easy to liquidate. Commodities, on the other hand, are physical trading assets. In a financial market, commodities are the first assets that have developed a trading system.
Commodities in the financial market comprise producers and consumers. The producers produce commodities for the daily use of consumers. Supply and demand have a decisive role in determining the price of commodities.
If the supply of a commodity is more, its price will decrease eventually. Conversely, the commodity price will go up if the demand is high. You can take an example of the international oil market to understand the price fluctuation.
The middle east oil production capacity is increasing rapidly. Consequently, we are witnessing a sharp decline in the price of oil. Therefore, the traders of commodities use this price fluctuation to make gains at any time.
What Are the Different Types of Commodities?
Four types of commodities cover the global consumer and producer market. All types of commodities are tradable assets. The following are the major divisions of commodities:
Agricultural commodities are a combination of edible and non-edible goods. Edible goods include wheat, rice, sugar, cocoa, and fruits. Non-edible goods include jute, cotton, pal oil, or rubber.
The global energy market is the largest in terms of trading capital. It includes crude oil, brent oil, electricity, uranium, ethanol, coal, and natural gas. Renewable energy also forms part of this commodity.
Metals are the core elements for manufacturing tools, instruments, jewelry, and other items. This commodity includes gold, silver, platinum, aluminum, zinc, iron, and all other mining metals. Moreover, it also includes extractable metals.
How Does Commodities Trading work?
Commodities trading work on the principle of futures contracts. The future contracts are binding documents that the traders use to sell or purchase commodities. These contracts pay off after the expiration of the contract date.
For instance, you get into the futures contract for purchasing 100 barrels of oil at $40 per barrel in 60 days. This contract restricts the seller and buyer to the $40 rate. The profit or loss phase of this contract becomes evident after the expiration of the data. In this example, the expiration of a futures contract is 60 days.
In technical terminology, the spot price is the price of the commodity after the expiration of the futures contract. Now, if the spot price is higher than your contract’s price, you will make a profit. On the hand, you will get in loss if the spot price is lower than your contract’s price of $40 per barrel. If you sell futures contracts of 100 barrels, you will benefit when the spot price ends up higher and vice versa. The future contract is the baseline and best trading method for commodities
Commodity Trading Methods
Range trading is a technical trading strategy when dealing with commodities. In this method, the highs and lows of the Bollinger Bands chart are the benchmark statistics for trading futures contracts. The pattern of this CCI chart becomes more comprehendible when using the tramline trading methodology.
The tramline trading technique will incorporate predictive analysis by covering all the market factors (technical and non-technical). Therefore, it will diversify the portfolio of the investors. That is why it gets the title of best trading method.
In a range trading method, the investors buy a futures contract when the price is at the lowest level. Similarly, investors tend to sell when the price graph is at its peak. In this manner, the chances of beating the spot price are high.
This is a short-term and more volatile approach in the commodity trading sector. In this trading strategy, the investors focus on the short trends of the commodities. They try to predict the extreme rise and fall of the commodities price. It is also a technical trading strategy.
The ROI in this method is higher and achievable. However, the risks are high since there are times when the markets do not fluctuate abruptly. This is the best trading method for commodities whose volatility is high.
Fundamental trading is the non-technical strategy of commodity trading. In this methodology, there are no charts. Rather, real-time factors such as weather, war, and crop yield are up for consideration. Therefore, this methodology will require a vast knowledge of the commodity’s factors.
With ample knowledge, the investor can predict the price’s impact and bet on the futures contracts. However, this methodology is not preferable owing to the absence of technical data and market trends.
How Will Tramline Trading Reshape the Commodity Trading?
Tramline trading is a technical strategy that will utilize the trend of CCI charts. Therefore, you can amalgamate different trading strategies to get a higher ROI. Furthermore, you can also depict better outcomes of the futures contracts while using the tramline trading methodology as a benchmark.
Tramline trading will cover all the core factors concerning commodity trading. Resultantly, the predictive analysis of the futures contract outcomes will be reliable.