For the last 6 years, I have specialized in day trading currencies. Particularly, I trade only 3 currency pairs: EURUSD, USDJPY, and EURGBP. I do this because of the fact that I can comfortably understand these pairs. Also, there is a lot of information that is available about these pairs. It would be very difficult for me to trade currencies such as Norway Krone and South African Rand because I don’t know where to get the finer details about these economies.
As I have written before, the economic calendar does not tell all the information. During these years, I have made a fortune. However, the fact is that I have also lost a lot of money. As a trader, all days will never be the same. It’s through losing that I have been able to avoid some of the most common mistakes traders do. Early this year, I decided to venture into commodities trading. I did this after reading an interesting book about commodities by Jim Rogers. The book, Hot Commodities is one of the best book on commodities that you will ever find. Rogers explains all the information you should constantly look at as a commodity trader. After deciding to get into commodities, I went to an investment banker who is also a serious day trader. He has accumulated a fortune trading currencies and options. I shared with him my new venture. He was shocked. He couldn’t understand why I decided to enter this murky journey of commodities trading with all the risks involved. In this article, I will highlight a few commodities and how a trader can trade them successfully. This year, most commodities have went further south. As a trader, I have benefited greatly in all these movements.
For long term investors, this year has been hell. Crude oil has moved from $100 a barrel to $40 a barrel. Gold has moved from $1300 to $1090 a ounce. The same has been the story for all the major commodities. This is best seen in the Bloomberg Commodities Index and the Rogers Commodity Index. This index was created by the Rogers I mentioned above. Supply and Demand The first thing you need to understand as a commodity trader is on the supply and demand. These are the key causes of movements in the commodities market. When the supply of a commodity increases, the price will ultimately go down. For instance, assume that Saudi Arabia, the largest crude oil supplier was to halt production, the price of oil will go up with the increasing demand. The same happens for all the other commodities. Crude oil Crude oil is one of the most interesting commodities to trade. Personally, I have specialized in trading the ICE Brent and WTI crude futures.
As stated above, this year has been a very sad story for the oil market with prices falling from $100 to $40 per barrel. There is a lot of potential for a downside with the increasing supply once Iran is allowed back to the market. Remember that Iran has some of the biggest oil reserves. On December 4th, the OPEC members are expected to meet at Vienna. Saudi Arabia has stated that they are willing to introduce cuts in production. However, OPEC supplies only 40% of oil. Non-OPEC members might continue production. Further down for crude oil. Gold Gold is an interesting commodity. To a common person, gold has no intrinsic value. Apart from jewellery, gold does not have any other real value. For investors, gold is a real haven because the United States government has placed the value of the dollar to gold. Since 1980s, gold has had a negative correlation with the US dollar. As a result, if the Federal Reserve goes ahead to hike interest rates, I expect gold to trade lower with the strengthening dollar. Agricultural commodities I have always avoided trading in agricultural commodities.
However, to be a good agricultural trader, one needs to conduct an intensive research on the supply and demand situation about the commodities. For sugar, one needs to understand the weather, political, and economic condition in Brazil which is the largest supplier. For coffee, one needs to look at countries such as Ethiopia, and Brazil. By having a good understanding of the climatic conditions, you will be good to go in agricultural commodities.