Commodities are physical goods that can be found naturally in the ground, or can be grown or produced. They can be traded in several ways, with their price movements mainly based on supply and demand. There is plenty of profitable opportunities available when trading commodities, if the right strategies are put in place.

Manufacturing processes as a whole are heavily inputted by commodities, which means the prices can influence the national economies or the stocks of the companies involved. As the price movement of a commodity can affect the entire supply chain, movement in this market can determine the prices of other financial markets, such as forex (FX) trading or stock trading.

Therefore, having a good strategy for trading commodities will not only help your decisions when investing in a particular asset, but can also help form the techniques and predicted trends of the rest of the markets in your portfolio.

Do your research

Before beginning to formulate any techniques when it comes to trading commodities, it is recommended to conduct extensive research about the market and the commodity you wish to invest in. Keep up to date with financial news and events that could affect the market, read research reports from brokers, and look out for the latest tips and advice on the types of commodity trading strategies you need to know.

Range trading

Range trading can be used in all financial markets but is particularly effective when trading commodities. It is based on the technical analysis of pricing data, and executing your trade dependant on the support and resistance levels of the asset’s price range. These levels determine whether or not the asset has been overbought or oversold, which is significant in a supply and demand process. The idea of this strategy is to buy assets when their prices are at the support level (the lowest price of a downward trend) and sell when they are at the resistance level (the highest point of an upward trend). To implement this trading style, traders must use technical tools such as the relative strength index (RSI), stochastics oscillators, and momentum indicators.

The downside to this trading strategy, is that the support and resistance levels are ultimately estimations, and so the asset’s price has the potential to move beyond these ranges. Also, the asset’s value may seem to maintain an overbought or oversold condition, which makes it difficult to identify good trading opportunities.

Breakout trading

A breakout trading strategy aims to profit when there are short term movements in the asset’s values, opening a long position if the price moves significantly higher, or a short position if it goes lower that of a defined price range. Likewise, a trader can buy or sell before the breakout, and aim to benefit from this predicted movement. The range is determined by support and resistance levels, and the breakout refers to when the price of the commodity moves outside of these bands.

Traders will need to use technical analysis to determine certain breakout levels, which works best when trends are substantial and long-lasting. However, this strategy does not perform well if the market is not able to establish these types of trends.

Fundamental analysis and trading

Unlike technical analysis used in the breakout or range strategy, fundamental analysis looks at the intrinsic value of an asset by examining related economical and financial factors. When trading commodities using fundamental analysis, the effect of these factors should be focused on the supply and demand of the asset.

For example, understanding how the weather can change the production of a certain type of crop or knowing that a war has been declared in an oil-producing country. Both of these factors would affect the supply and demand of the commodity, and therefore the price movement in the market. Traders can use the analysis of this factors to predict the trends of the commodity and open a position accordingly.

The challenge that this type of strategy poses is its time-consuming nature. It takes a lot of research to implement fundamental analysis and forecasts, compared to technical analysis, and requires an understanding of geopolitics and macroeconomic principles.