A 5-Point Plan to Win in Commodity Trading

A 5-Point Plan to Win in Commodity Trading

As a day trader, there are many asset classes you can use to make money and grow your portfolio. For starters, commodities and currencies give traders the best opportunities. Later on, traders can decide to venture in futures and options trading. Currencies, commodities, and stocks give traders a good opportunity because they are easy to understand and implement.

As a rule, I advise traders to perfect their art of investing in one asset class. For instance, if they are good at currency trading, then they should focus on it. The same way, if they are perfect at commodity trading, I always recommend that they stick to commodities. The beauty of this is that they are able to study and understand the market and then make sound investment decisions. If they try to focus on so many asset classes, then it will be difficult for them to invest soundly.

Focus on few commodities

There are 20 commodities available for traders today. They include: gold, silver, tin, soy beans, corn and palladium among others. To trade one of these commodities, one needs to take time to study its dynamics. For beginners, this can take more than one month. Therefore, I recommend that you pick one or two commodities and study it completely before making your first trade.

Understand the macro

As a currency trader, it is important to understand the macro environment. This is because the commodity prices will always move according to the macro themes of the moment. For instance, the upcoming rate hike will lead to the reduction of commodity prices. This is because the total cost of borrowing the money to buy commodities will rise. Another example is in the current Iran deal that was recently signed by the world super powers. If the deal goes through, then sanctions against the country will be lifted and their supply of oil will increase. With the increase oil supply, it is expected that the oil prices will continue going down. The last example is when there is an increase supply of agricultural commodities such as corn. If there is an oversupply, then the prices will go down.

Relate the commodity to other markets

Another key strategy to have in place in commodity trading is on the complex relationship that exists among them all. For instance, historically, gold prices have always gone down with a strong dollar. When the dollar strengthens, the price of gold reacts by going south. I addition, the price of gold goes up when instruments such as indices fall as investors move their money from gold, which is a safe haven. Therefore, you should never trade gold as an individual commodity. You should instead trade it while comparing it to other instruments.

Trade with the short term

As a day trader, you should avoid holding commodities for a long period of time. This is simply because the price of commodities will always go up and down. For this reason, the trend is your friend when making financial decisions. The challenge comes when you have to identify a trend. I usually prefer using a 20-day high or low when identifying a trend. In addition, I advise that you stay away from a market that is in consolidation mode because of the risks involved. There are a number of instruments you can use to identify the trend. Technical indicators such as market sentiments, MACD, and moving averages can help you identify a trend.

Ignore the experts

In commodity trading, there are thousands of experts who are always live on air or in the online space. These experts usually represent big banks and big hedge funds and therefore have billions of dollars in investing capital. My recommendation is that you should ignore these people because most times, they are usually wrong. When I started trading, my strategy was to buy an asset just because an expert being interviewed in Bloomberg recommended a buy position. At the end of the day, I lost a lot of money.

I believe that by following these strategies, you will be at a good position to make good investment decisions. You will be at a good position to only buy or sell when it is appropriate. Thus, you will make a lot of money in trading commodities.