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TOP 10 Commodity Day Trading & Swing Trading Rules To Live By In 2022 (For Beginners) - YouTube
Channel: The Secret Mindset
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Commodities trading is one of the oldest forms
of activity, yet it is also one of the most
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widely misunderstood.
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Trading or investing in commodities requires
more specialized knowledge and may carry more
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risk than more well-known investments but
at the same time offer unique opportunities
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for investors to trade and profit from their
changing prices.
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In today’s video we’ll discuss about commodity
trading and I will share 10 important rules
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you must follow to gain an edge on commodities
market.
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1.
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Find your niche commodity market
There are largely three main types of commodities:
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Metals (with the most traded metals being
gold, silver, copper and platinum).
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Agricultural products or soft commodities
(coffee, cocoa, wheat and corn)
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Energies (crude oil, natural gas, coal).
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Most successful commodity traders have specialized
in trading a single commodity because each
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of these markets is very unique.
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In fact, very few traders seem capable of
trading all commodity markets equally well.
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So you have to find your own niche and master
a single market.
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Get familiarized and know the ins and outs
of your niche commodity because this is the
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first step to build a successful strategy
for commodity trading.
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Finding your market is simply a matter of
realizing which market you feel more confident
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trading.
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2.
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Commodities have strong cyclical trends (prices
tend to trend)
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Commodities prices are derived from the law
of supply and demand.
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The interaction of supply and demand can inflict
bullish and bearish trend development.
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Generally speaking, you will find sustained
periods of time when high demand or short
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supply controls a market, driving prices higher,
or when oversupply or lack of demand drives
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prices lower.
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As a result, commodity prices go through extended
periods during which prices are well above
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or below their long-term price trend.
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3.
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Start using fundamental analysis to predict
future prices
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When it comes to commodity trading, technical
analysis isn’t enough.
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You need to start using fundamental analysis
to predict future prices.
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Fundamental analysis focuses on analysing
economic factors that could influence the
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price of different commodities - particularly
those that relate to supply and demand, like
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we discussed earlier.
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This might mean paying attention to:
• Macroeconomic data, like trends in GDP,
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unemployment and retail sales.
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• The strength of the end markets of different
commodities, which will influence demand for
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those
• Market cycles, such as whether the markets
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are in a bull or bear cycle.
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This involves long-term analysis of market
trends to make judgements about what's happening
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today.
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• Changing policies from large economies
and how they might influence commodity demand.
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That is why, if you are a beginner, it is
better to use a long-term strategy using fundamental
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and technical analysis to forecast commodity
prices.
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You should look for trends that are developing
that will cause a shift in supply and demand
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factors.
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The longer-term trends in commodities are
easier to spot with fundamental analysis,
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and you could use technical analysis to capture
shorter-term movements in commodities prices.
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4.
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Learn the seasonality of commodities
Most traders will either use technical analysis,
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fundamental analysis, or a combination of
both.
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But the time element, the day of the week,
or the month of the year also play a big role
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in how certain commodities may behave.
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When you focus your attention purely on price
and time, without the noise of indicators,
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you may notice some pattern shows up during
a certain time.
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These patterns are known as seasonal patterns
or seasonal cycles.
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The seasonal cycles will only give you the
tendency of a particular commodity to bottom,
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top, rally, or fall at a certain point in
time.
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The seasonality is just an average.
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In this regard, it's better not to use it
in isolation.
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Rather, use it in combination with your technical
analysis as the market can deviate from its
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seasonal pattern.
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Let’s take wheat as an example.
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Here is a strong inclination for wheat prices
to decline during the last weeks of winter
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and spring as harvest time comes close.
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The other tendency is for prices to rise from
the harvest lows into the fall or early winter
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period.
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Wheat prices start a cyclical weak period
by January or February, in most years.
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So pay attention to seasonality.
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5.
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Use volatility to your advantage
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Volatility is simply the price variance of
a commodity over time.
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The wider the price range from low to high
on a daily, weekly or monthly basis, the higher
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the volatility and vice versa.
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And when considering which commodity to invest
in or trade, one of the most important considerations
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is its volatility.
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Those commodities that have a higher degree
of volatility tend to attract those who are
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active traders rather than investors.
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When the price of a commodity is highly volatile,
it attracts more speculative and short-term
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trading activity.
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Now, each commodity has different levels of
volatility.
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For example, oil or gold prices tend to move
more than coffee or wheat.
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What you have to do is to simply establish
the price range of your commodity and trade
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accordingly.
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6.
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Beware of weather conditions
Weather can also influence commodity prices.
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In particular, abnormal or unexpected weather
changes like extreme rain or drought can have
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a significant impact on agricultural commodities.
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Commodities like cocoa and coffee are harvested
and grown, and therefore need consistent weather
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cycles.
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The weather can also influence energy commodity
prices, as severe winters increase the demand
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for heating, which in turn increases the demand
for heating oil and natural gas.
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The same goes for extreme warm weather, which
increases the need for air conditioning.
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This raises the demand for the commodities
involved in electricity production, like natural
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gas and coal.
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7.
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Pay attention to US Dollar correlation
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Along with supply and demand, the behaviour
of the US dollar can also influence commodity
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prices.
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The US dollar is the world's reserve currency
and, in international markets, commodities
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are priced in USD.
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This means that the prices of commodities
are directly linked to the value of the dollar
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against foreign currencies.
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For example, if the value of the dollar drops
against other currencies, it takes more dollars
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to purchase commodities than it does when
dollar is valued more highly.
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In addition, gold is seen as a safe haven
asset, and is often where investors turn when
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the value of the USD goes down, particularly
in times of economic turmoil.
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There's normally an inverse relationship between
the value of the dollar and commodity prices.
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The prices of commodities have historically
tended to drop when the dollar strengthened
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against other major currencies, and when the
value of the dollar weakened against other
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major currencies, the prices of commodities
generally moved higher.
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This is a general rule and the correlation
isn't perfect, but there's often a significant
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inverse relationship over time.
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8.
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Use hedging strategies with futures contracts
The commodity markets are made up primarily
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of speculators and hedgers.
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It is easy to understand what speculators
are all about; they are taking on risk in
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the markets to make money.
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Hedgers are there for pretty much the opposite
reason: to reduce their risk of losing money.
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One way to hedge commodities is through a
futures contract.
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The airline sector is an example of a large
industry that must secure massive amounts
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of fuel at stable prices.
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Because of this need, airline companies engage
in hedging with futures contracts.
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Future contracts allow airline companies to
purchase fuel at fixed rates for a specified
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period of time.
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This way, they can avoid any volatility in
the market for crude oil and gasoline.
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A farmer is another example of a hedger.
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Farmers grow crops—soybeans for example—and
carry the risk that the price of their soybeans
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will decline by the time they're harvested.
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Farmers can hedge against that risk by selling
soybean futures, which could lock in a price
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for their crops early in the growing season.
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Investors may also decide to invest in a precious
metal as a hedge against periods of high inflation
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or currency devaluation.
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These are more advanced techniques, but if
you’re a long term trader, learning to hedge
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is a must if you want to protect your position.
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9.
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Use stocks to trade commodities
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Many investors who are interested in entering
the market for a particular commodity will
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invest in stocks of companies that are related
to a commodity in some way.
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For example, investors interested in the oil
industry can invest in oil drilling companies,
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refineries, tanker companies, or diversified
oil companies.
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For those interested in the gold sector, some
options are purchasing stocks of mining companies,
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smelters or refineries.
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Stocks are typically thought to be less prone
to volatile price swings than futures contracts.
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Stocks can be easier to buy, hold, trade,
and track.
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Plus, it is possible to narrow investments
to a particular sector.
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Of course, investors need to do some research
to help ensure that a particular company is
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both a good investment and commodity play.
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10.
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Use ETFs or mutual and index funds to trade
commodities
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Exchange-traded funds (ETFs) and exchange-traded
notes (ETNs) are an additional option for
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investors who are interested in entering the
commodities market.
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ETFs and ETNs trade like stocks and allow
investors to potentially profit from fluctuations
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in commodity prices without investing directly
in futures contracts.
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One of the main advantages of investing in
commodity ETFs is the diversity that comes
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with investing in a range of assets via a
fund, rather than picking individual assets
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to invest in.
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You can also use mutual and index funds to
invest in in stocks of companies involved
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in commodity-related industries.
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As always, if you learned something new and
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Until next time.
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