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What Are The key Factors To Keep In Mind In Order To Be A Successful Commodity Trader?

By Sera Akinci  |  09/11/2017 06:57

Commodity trading is the process of buying and or selling commodity futures and options to profit from the movements in price. Yet again, it is vital to create a strategic plan even before you start trading commodities and risk any capital. Bare in mind that watching and reading news about commodity for the latest tips will not provide a trader with the necessary skills to succeed in the commodities markets. Although, regular strategies which tests through simulations over time, will help you understand risk and reward as well as the volatile nature of markets.
 
As a trader, you should always seek ways to improve your technical skills; no matter how skilled you are or not. When it comes to entering and exiting risk positions in the futures and futures options markets, knowledge of technical analysis is just a small proportion. In fact; it is more vital to have a clear understand of the fundamental, supply and demand analysis, which will help a trader avoid unexpected changes that tend to occur when it comes to the evolution of output and consumption in raw material markets.
 
Furthermore, much of the commodity trading strategies revolve around a range trading or breakout methodology. The trader should decide which strategy would fit them the most.
 
So; what is Range Trading?
 
Range trading is seeking to make investments near the bottom end of a range (support) and selling at the top of that range (resistance). Range strategies is also used when the market is inadequate of direction. By setting support and resistance, you will be able to manage your money much better; avoiding big money losses.
 
The graph below indicates the support and resistance. You can set your own support and resistance.
 
When the price- candlesticks pass the resistance level, the trader will then need to plan to enter into the market and sell towards support.
 
Trading Breakouts
 
Trading breakouts is when an investor takes a position within a trend’s initial stages. Predominantly, this strategy can be the starting point for major price moves, expansions in volatility. It can also grant downside risk when managed correctly.
 
When a trader falls into a long position after the commodity price breaks above resistance or enters a short position after the commodity breaks below support. Although, when the commodity trades outside the limits of the price barrier, volatility gravitates towards an increase and prices mainly trend in the breakout’s direction. The reason for it to be a part of the trading strategy is due to these setups being the starting point for future volatility increases and large price swings. In other words, breakouts are the root for major price trends.
 
In fact, the logic behind this strategy is simple: A market can’t continue its trend without forming new highs or new lows. However, this trend works the best when the trends are strong and long-lasting.
 
Fundamental FX Trading Strategies
 
Fundamental trading relies upon factors such as; political and geographical implications which would affect the supply and demand. Understanding the global economies and their impact on the commodities is challenging to new traders. For instance; an investor might decide to trade Coffee because the weather is warmer during winter in Brazil and Columbia. On the other hand, another trader might expect the demand for crude oil to increase in Saudi Arabia, leading to a long position in oil futures.
 
Nonetheless, commodity trading is a little different compared to traditional equity or currency trading. The number of factors that impacts the price and the trading view on a commodity are a lot more diverse and broad-based.
 
5 tips to look out for while trading any commodities:
 
1. If you want to trade any agricultural commodities, you should look out at demand and supply factors which are the most important. E.g. A sudden shortage in supply can cause agri commodity prices to increase.
 
2. US Dolllar Currency Variation: Most currency variations will influence the price of commodities such as the US Dollar Index’s influence on gold and oil.
 
3. Inflation: An inflation would be a sign of a robust economy which will eventually lead to a pick-up in demand for commodities.
 
4. US & Global Data Flows: The macro data will be helpful in reflecting FED’s actions, jobs data, productino data, the PMI data for manufacturing and services, the stance of the central banks and so on. All these data announcements will also have an impact on commodity prices.
 
5. Specific commodities are influenced by bulk demand and supply. E.g. Industrial metal prices are being affected by Chinese demand which accounts for 50% of consumption. On the other hand, OPEC actions and US Inventory will have an impact on the price of crude oil.

By Sera Berfu AKINCI
 

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