Commodity Trading Strategies
Offering a variety of assets, commodities are among the most popular instruments on the global market. There is a variety of different commodity trading strategies that can be employed to help you to achieve results when trading. In our guide, you'll discover a range of strategies and methods that can be employed across all kinds of commodity trades.
- What is a commodity trading strategy ?
- How to choose the right commodity trading strategy
- Trend trading
- Range trading
- Breakout trading
- Seasonal trading
- New trading
- Fundamental and technical analysis
- Fundamental analysis
- Technical analysis
- What is the best commodity trading strategy?
- Trade commodities with Tradu
What is a commodity trading strategy?
When trading different types of commodities, it's important to understand the various strategies that can be used. Developing and using your own strategy means that you'll be making trading decisions based on robust analysis and data instead of relying on impulsive choices.
The main advantage of using specific strategies is that it can help to reduce risk by providing clear and identifiable opportunities when trading.
It's important to remember that, in most cases, a trader will take into account more than one commodity trading strategy when making decisions to help them to achieve the best possible outcome. Strategies can also range from basic level to the more advanced and complex.
It's also vital to revisit your strategy from time to time to ensure that it's still the best one for your goals, particularly as there are a number of successful strategies for commodity trading that can be used across many different assets.
How to choose the right commodity trading strategy
The best commodity trading strategy for you will depend on how you want to trade. There are many different ways to trade commodities including through derivative contracts, futures, forwards, options and CFDs. Please note you cannot trade futures, forwards or options with Tradu; their inclusion here is for informational purposes only.
As an example, when trading commodity futures, trading strategies should be chosen that enable you to predict the market direction over a set period of time. Another example is commodity spread trading strategies, which should take into account how big the difference between the buy and sell price of an asset is likely to be.
Discover more ways to trade in our guide on how to trade commodities.
Trend trading
As you might have guessed, trend trading involves analysing movement trends over a period of time before placing a trade. Investors look to trade in the same direction as the trend so it's important that the right technical indicators are used to predict the pattern.
Using trend trading as a commodity trading strategy means identifying significant uptrends and downtrends and placing trades accordingly. While it might seem to be one the more basic strategies, technical analysis needs to be properly understood to be able to correctly interpret data, charts and patterns.
Range trading
When there is no clear upward or downward trend, the commodity market is likely to trade within a set range. This means that the price of a commodity will often move between two particular values.
Trading on a range means going either long or short at any given time, depending on the direction of the market. Therefore, unlike trend trading, this commodity trading strategy doesn’t just focus on one market direction.
This type of strategy also relies on technical indicators. It's crucial to assess the width of any given range and implement risk-management strategies to avoid loss, especially as range trading can be subject to great volatility.
Another term for this strategy is support and resistance trading. Resistance refers to the highest point within a range and support is the lowest. Essentially, when using this strategy you should aim to buy when the price falls in a downward direction to support level, and sell when the price rises again up to the resistance value. This is also known as the 'bounce'.
Breakout trading
Closely linked to range trading, this strategy focuses on the 'break' of a range, rather than the 'bounce'. This can be a successful strategy for commodity trading as there is potential to make a profit if you buy when the price of an asset is about to break through the defined resistance. You can also gain from selling before the value drops below the support level.
Again, this strategy relies largely on technical indicators and chart patterns to determine if and when a price will break out of the set range.
Like all strategies, trading breakouts is risky and it can be difficult to know when to cut losses, even for professional investors. It also only provides a certain amount of market opportunities as many other commodities are likely to be following trends.
For these reasons, it's wise to use breakout alongside other commodity trading strategies so that you have the opportunity to capitalise on a variety of markets.
Seasonal trading
This is one of the most traditional strategies used in commodity trading. Seasonal trends can be identified across many major markets and usually involve recurring patterns over set time periods. These can be seen across average trading days as well as over longer periods such as particular months and holiday seasons, including Christmas.
Certain commodities are also more likely to be in demand at particular times of the year. As an example, crude oil demand generally rises in the winter months and then again in the summer as drivers increase their travel.
Understanding seasonal effects ahead of time can help to identify potential opportunities for successful trades but most experienced traders tend to use a commodity seasonality trading strategy as part of a wider approach.
Other methods, such as commodity spread trading strategies, can be combined with seasonal trading to provide a greater chance of identifying opportunities.
News trading
News can have a significant impact on the price of commodities, particularly when they're directly related to a specific asset or company.
Developments relating to supply and demand of a commodity can alter trader sentiment and therefore increase or decrease the value. A recent example is the Russia-Ukraine war and the subsequent sanctions placed on Russia. Economic news can also affect the wider market in general, often resulting in reversals of trends.
It's important to be aware of current news, whatever your preferred commodity trading strategy, and have some knowledge of how certain events, situations and climates can create market volatility.
If you choose to use news trading as a main strategy, you'll need to have the ability to react quickly to announcements and press releases and understand that, as world events are often unpredictable, there is inherent risk when placing trades using this method.
There are many factors that can affect the value of commodities. To find out more, read our guide to what drives commodity prices.
Fundamental and technical analysis
Rather than focus on just one strategy, most traders find it helpful to use a combination, drawing on two main techniques.
Fundamental analysis
It's useful to take into account fundamentals to determine a commodity's true value. These include wider market aspects including overall supply and demand, industry trends, market releases and company information.
Technical analysis
This involves focusing on price history and performance, as well as sentiment, to determine the future value of a commodity. This is usually achieved through technical indicators such as data, charts and patterns.
What is the best commodity trading strategy?
There is no right or wrong answer to this; the best strategy is a highly subjective matter. Each trader has their own approaches, methods and considerations, so what works for you might not be the ideal process for someone else.
The most successful strategies for commodity trading are those that you feel confident applying across a variety of trades and those of which you have a deep knowledge. If you're able to combine a range of strategies, you'll allow yourself greater opportunities.
Building knowledge of commodity trading strategies takes time so it's worth investing some effort into research before jumping in. And remember that no strategy is risk-free. Always be sure to weigh up your risk/reward ratio and implement risk-management tools where appropriate.
Trade commodities with Tradu
Employ your commodity trading strategies with Tradu:
- Open your trading account: Sign up for your trading account.
- Expand your knowledge: Learn more about trading, the markets and the features of our advanced platform.
- Create a strategy: Use your knowledge to develop an approach that works for you.
- Begin trading: Take advantage of our advanced features to help to get the most out of your strategy when you start trading.
- Expand your portfolio: Trade CFDs on a variety of markets including forex and indices.
Get up to speed with all aspects of commodity trading: