What are the Different Types of Commodity Trading Strategies?

Commodity trading strategies may be divided into two broad categories. There is technical trading, which uses a compiled history of prior price movements to predict future price fluctuations. The other is fundamental trading, which focuses on monitoring supply and demand movements to estimate future price changes.

The process of commodity trading involves the exchange of raw or primary products such as gold or oil on formal markets. The first of the technical commodity trading strategies is also the most intuitive and is known as range trading. When a commodity becomes “oversold” on the market, its price falls sharply. A range trader would thus purchase large quantities of such goods at the bottom of the market price range. If a commodity becomes “overbought” on the market, its price rises, meaning range traders would sell the commodity at the top of the market price range. Buying low and selling at higher prices is often considered the cornerstone of most profitable businesses, making range trading one of the most accessible and popular commodity trading strategies.

When markets are strongly trending, traders may prefer the trading breakout strategy. A breakout trader will focus on entering a market in the early stages of a trend. When the market for the commodity is up-trending, or approaching new highs, a breakout trader will tend to buy the commodity. When the market for the commodity is low-trending, or approaching new lows, a breakout trader will tend to sell the commodity. The difficulty with such a strategy is differentiating between short-term fluctuations and a genuine long-term market trend; a second difficulty is anticipating when a trend will change or end.

Fundamental trading is a rather different animal; instead of monitoring price and market fluctuations, a fundamental trader examines factors that cause such fluctuations by affecting supply and demand. For example, he may take note of unfavorable meteorological reports regarding the climate in rice-producing provinces of China and India. Anticipating a poor harvest, he would then tend to buy rice now so he could sell it later when supply falls and price rises. Such a strategy is not recommended for novices, since the speculation can be affected by many factors.

Day trading is considered a risky business, subject to market volatility. A successful trader must remain neutral as he watches his entire portfolio deplete in value and remain firm in his conviction that tomorrow his decision will yield profits. Rather than try to make a quick buck through risky tactics, a trader in it for the long haul will seek to gradually accumulate his assets with sound commodity trading strategies, building up an arsenal of knowledge along the way.