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6 Simple Commodity Trading Tips

Tom Cleveland trader
Updated 26 Jun 2024

If you’ve already learned to trade in the stock and/or forex markets, then good news – many of the skills and techniques that you have learned while trading will easily transfer over to the commodity market. To help you get started, we’ve provided 6 useful commodity trading tips to remember:

Read on to learn our expert’s top commodity trading tips.

1.    Trade on Volatility

Volatility is always an opportunity for gain and can result from changes in the weather, labour strikes, geopolitical tensions, monetary policy and the value of the U.S. Dollar, or even crop infestations or global pandemics.

Market sentiment and the ability to forecast changes in demand and supply are extremely important, a focus of your fundamental analysis. The proper use of leverage must be learned, as well. Start low before ever approaching upper limits.

Commodity Trading Tips

2.    Pay Attention to Seasonal Characteristics

Many commodities also display seasonal characteristics, as well as long-term trends. While short-term-focused traders rely on volatility, swing and position traders opt for following the ever-developing trends over time.

For this reason, it is often said by veterans that position trading is the best path to profits. If your preference is day-trading and you have an appetite for volatility, you can certainly profit there, as well.

3.    Solid Technical Analysis

Technical analysis will still be your trusted tool for entries and exits. One key indicator is the 200-Day Moving Average for assessing longer-termed trends in the making.

Another good indicator for detecting oversold and overbought conditions is the Commodity Channel Index (CCI). Lastly, Fibonacci analysis tools will likely display important levels of support and resistance to guide your trading strategies.

Trend following trading strategies offers the most consistent rewards. Be patient, determine confirmations for the trend, and then ride the trend, your friend.

Trends are generally driven by demand and supply forces, which may vary based on the strength of an economy, the value of the U.S. Dollar, level of invested capital by producers, changes in commodity inventories, production levels, and weather forecasts. For example, commodity prices are typically inversely correlated with the direction of the USD Index, since value is independent of U.S. monetary policy.

5.    Robust Risk Management

Volatile markets require that traders attend to various risk management techniques, in order to trade another day when your luck runs out. No one is perfect in the commodities trading arena. You will incur losses, but you will want to limit your downside by using stop-loss orders or options or both. Approach this market with a disciplined trading plan, otherwise, you are gambling.

Commodity Trading Strategies

6.    Monitor Position Sizing

Position sizing is also key – never bet the ranch, but there are appropriate times when increasing your position size makes sense.

If anxiety levels rise when only trading one or two commodities, then investing in a basket of commodities might work best for you. Whatever your choices, the goal is to record consistent “net” gains over time and to enjoy the process.

Tom has over 30 years of experience in the payments industry, including serving as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer.