How to Perfect Your Commodity Trading Strategy – Introduction
Commodities control the world. In fact, without commodities, the world financial system as we know it would not exist. This is because people depend on tens of commodities every day. For instance, directly and indirectly, we all use crude oil every day. As a trader, you can make a good fortune by trading commodities. In this article, I will highlight a few strategies to help you become a better commodity trader.
- Have passion about commodities
First, you need to be passionate about commodities. Without this passion, you will not succeed. You will not have the morale to wake up to read and trade about commodities. Therefore, you need to fall in love with the commodities market. If you are not, then you should find another asset class to trade in. This could either be currencies or equities.
- Identify the commodity
There are tens of commodities that can be traded in the financial market. There are metals such as silver and agricultural commodities like cotton among others. Ideally, you want the commodity that you identify to have a few characteristics. One, it should have enough liquidity. This means that it should be in high demand. Selecting such a commodity will help you to enter and exit a trade at any time. Second, the commodity should be followed in the media. Such a commodity helps you in terms of getting the relevant news.
- Demand and supply
After identifying the commodity, you should understand about its demand and supply. The price of any commodity is affected by the demand and supply. The higher the demand results to a higher price in the commodity while a low supply leads to a lower price. As a trader, you need to identify the demand and supply of the commodities. Understanding this will help you know when to buy or when to sell a commodity. For instance, if you are an oil trader, you need to know about the leading oil producers. You also need to know about the state of supply in the commodity. Fortunately, sources about all this are available in the internet.
- Come up with a model
You then need to come up with a model. This model is basically a set of parameters which when met will make you buy or sell the commodity. A good way to start is to identify the technical indicators that are great at analyzing a certain commodity. The Commodity Channel Index is a good way to start. It is one of the most common commodity indicator in the market. You should not create this model in a hurry. Instead, you should strive to test and backtest it using data that is available in your trading platform. As you test, you should make the necessary amendments.
- Learn how to hedge
To succeed as a commodity trader, you need to learn how to hedge. This is because commodities relate with both companies and currencies. For instance, crude oil is a major source of income for Canada. If oil price falls, it means that the Canadian dollar will be affected. At the same time, companies involved in the oil extraction and marketing in Canada are also likely to be affected. Hedging can help you a great deal with taking advantage of these pricing issues.