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CMDTYs Trading Strategies

Every trader is going to look at the commodities trading process somewhat differently. However, there are certain key elements common to all traders, which we offer up for your consideration in this article.

  • 01

    The Commodity That is Correct For You

    Commodities may often have similar origins to each other (such as two different types of metal), but in some cases that is where the similarities end, with liquidity levels and fluctuation frequency often being completely different. In other words, if you were looking for a commodity with a generally high level of volatility, some metals would be more suitable than others.

  • 02

    Forward Planning

    Make sure to plan out a strategy before entering a trade, and set points in your mind at which you will close out a trade, whether you’re in a profit or loss-making position. Stop-losses and limit orders can be beneficial in this regard, and can also help traders from suffering severe consequences in fast-moving markets; these tools are available from ETX Capital in certain circumstances, although traders should take into account that only certain types of stop-loss are guaranteed. You can find out more here (provide link to relevant page).

  • 03

    The Commodities / Indices Relationship

    Commodities differ from stocks in that they have no takeover risk and are not really affected by the release of quarterly reports (although production rates can act as a somewhat similar indicator in some regards). Commodities themselves are usually unaffected by general movements of indices. However, the opposite way round is a different story; the movement of commodities certainly has the potential to have a drastic effect on the stock markets, because many of the companies listed are either partially or wholly based around one or more of these commodities. Major drivers of commodity prices include weather patterns, crop and livestock diseases, production strikes, substantial oil finds and emerging technologies. It’s therefore important for commodity traders to keep an eye on news events related to these factors.

  • 04

    Commodities Can Drive Equity Value

    Following up on this point, the fluctuating prices of commodities have the ability to shift the values of other markets, something which was made abundantly clear by the sharp drop in oil prices at the end of 2014 and the beginning of 2015. This had a significant effect on the share price of many energy companies; although conversely many airlines reaped the benefits of substantially less expensive airline fuel.

    The upshot of this is that those trading equities will often closely study commodities, particularly related commodities; they understand that watching the latter can potentially be beneficial when it comes to trading the former. However, it is wise to be cautious in this area, particularly if you’re a trading beginner. There can often be more to particular stocks than meets the eye, and traders should exercise some degree of caution before making quick trading decisions based on a perceived relationship between a particular commodity and a specific equity.

  • 05

    What Are Safe Haven Commodities?

    Safe haven commodities are assets that are viewed by investors to have a greater degree of stability than others. They are known either to be in continuous demand (for example, food), restricted supply (precious metals), or unable to increase in supply quickly enough to meet increasing demands (for example, coffee and cocoa).

    Gold has a strong reputation as a safe haven asset, and has offered a sense of security to investors in the past. Many traders have relied on gold to turn a profit in periods of crisis - for example, during periods of significant economic downturn, currency slumps, or war – when their open positions on other securities have taken a turn for the worse.

    ETX Capital offers a large selection of commodities to trade on within the categories of metals, agriculture, livestock and energy. Register here to start live trading today, or try a demo account first.

    To learn more about trading commodities, read up on our ‘What are Commodities’ and ‘How to Trade on Commodities’ pages.

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