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Types of Commodity Trading Strategies

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Commodity trading strategies are simply the basis for why and when you will buy and sell commodities. You should have some well thought out strategies before you begin trading commodities. This does not mean watching the financial news or reading a commodity newsletter for the latest trading tips. Rather, you should have consistent strategies that will let you know under what circumstances you will buy, sell and limit your losses.

Most commodity trading strategies use some form of technical analysis for the trading decisions. I mainly use technical analysis when I trade, but I also monitor the fundamentals of the markets. I’ll first discuss the basic commodity trading strategies using technical analysis and then I’ll include some information on using fundamental analysis for trading commodities.

Most commodity trading strategies consist of either a range trading or breakout methodology. Each type of strategy has its pros and cons, so it is up to your personal taste on which type of strategy might work best for you. I actually use variations of both types of strategies in my trading.

Range Trading Strategy

Range trading in commodities simply means buying near the bottom of a range (support) and selling at the top of a range (resistance). Another way to look at this strategy is that one might look to buy a commodity after it has experienced a lot of selling and becomes oversold. Oppositely, one might look to sell a commodity after it has had a long rally and becomes overbought.

There are numerous indicators which measure overbought and oversold levels like RSI, Stochastics, Momentum and Rate of Change. These strategies work well when the market has no significant trend. However, a trader could have a string of bad losses when a market forms a major trend, as markets can stay overbought or oversold for long periods of time.

Trading Breakouts

Trading breakouts in commodities means that a trader will look to buy a commodity as it makes new highs and sell a commodity as it makes new lows. New highs and lows can easily be spotted on a chart, as they are the peaks and troughs. Many professional traders use these techniques when they are managing large sums of money.

The philosophy for this strategy is simple – a market can’t continue its trend without making new highs or new lows. This strategy works best when commodities are trending strongly. It doesn’t matter whether the trend is up or down, as you are buying new highs and selling(shorting) new lows. The drawback of this strategy is that it performs very poorly when markets don’t establish strong trends.

Fundamental Trading Strategy

While trading breakouts and trading ranges usually come with specific setups for buying and selling commodities, fundamental trading leaves much more room for interpretation. For example, you might buy soybeans because the weather has been dry during the summertime and you expect a much smaller crop. Or, you expect demand to increase for crude oil from China, so you buy oil futures.

I do not recommend this type of trading for the new commodity trader, since opinions can easily be swayed the hype that is often reported in the news. Even worse, you will be left wondering where to get in and out of the trades. You can get lucky a couple of times trading off the news, but this type of trading claims a huge share of victims every year.

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