A commodity trading system is a mechanical means of trading commodities that has specific rules for entering and exiting trades. These rules are essentially plugged into a software program that will monitor prices and data of commodities and trigger buy and sell signals for you.
Commodity trading systems have become the standard means of trading for a growing number of professional commodity traders. The main reasoning is that emotions are taken out of the equation when trading. This way, you simply implement a strategy that has been successful, or you believe will be, without having to re-work a trading strategy for the commodity markets every day. It will also keep you disciplined (if you follow the rules) and prevent you from taking trades that don’t fit your criteria.
Most commodity trading systems are built around some type of technical indicators. These may be moving averages, stochastics, RSI, breakouts of 20-day highs or lows, etc. There is an infinite amount of variables that you can use in developing a system. Many who create trading systems agree that keeping it simple is often better than trying to complicate things with too many variables.
Types of Commodity Trading Systems
There are normally two types of commodity trading systems: Trend following and range trading. A trend-based system takes advantage of markets that have either established an uptrend or downtrend. The theory is that there is a better chance for prices to continue in that direction rather than reverse. Often, these systems rely on just a couple of trades that make most of their profits for the year – the big trends.Oppositely, a range-based trading system expects that most markets are not in a trend and will buy as the commodity moves to the low end of the range and sell at the high end of the range. These systems work well in times of low volatility when the markets don’t have large moves. You have to make sure that you use proper money management and don’t hold on to the bitter end if a trade moves strongly against you.
