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Commodities are vital, not only because of their financial contribution to national economies, but also because they are key components that are used to manufacture other products that we use worldwide on a daily basis.
Oil, for example is the most popularly traded commodity, and is refined and used in many petrochemicals for transportation, such as diesel, jet fuel and gasoline.
On an online trading platform like Plus500, for example you can buy and sell commodities using financial derivatives.
When opening a trade in commodities on the financial market, you may want to implement a strategy, to help to keep you and your investment on track, executing thorough analysis and planning to give yourself the best chance to make a profit.
If you're wanting to employ a strategy and start trading in commodities, here are some of the top strategies that we would suggest.Breakout trading
When a commodity moves outside of a specific price range, this can present itself as a lucrative opportunity to enter the market, with a technique known as breakout trading.
The market is constantly fluctuating, influenced by a multitude of factors, and therefore, a commodity's price can sometimes move outside a specific resistance or support level.
Breakout traders attempt to take advantage of this movement by opening either a long position in the market if the commodity has 'broken' above its resistance level, or a short position if the stock 'breaks' below its support level.
Range-bound trading
An alternative trading strategy is range-bound trading, where you would attempt to buy at the lower support level of a price range and sell at the highest resistance level.
In order to identify these levels, you will need to apply technical indicators that will inform you of the market conditions and whether commodities have been highly overbought or oversold.This will require you to identify the main support and resistance levels in the market, and draw connections between these and the trendlines on the charts.
Two technical indicators that can help you to decipher this are the Stochastics and Momentum indicators, and the Relative Strength Index.
Fundamental trading requires you to utilize technical and fundamental indicators as a basis for your trading decisions.Fundamental trading
Fundamental trading requires you to keep up-to-date with your research, so that you can make informed predictions regarding the best price-points for the future.You will therefore have to look at individual factors affecting the market, which could include issues relating to supply and demand of that commodity, that is influenced by external factors, for example.
As previously mentioned, supply and demand is a vital factor that influences the price position of a commodity.
When demand exceeds supply, prices will increase, on the other hand, when supply overtakes demand, prices will fall.
The supply of a commodity can be affected by many external factors, including the weather, as some commodities which have to be harvested, can be detrimentally affected by a bout of bad weather, resulting in a poor yield of that crop.
If you're considering adopting a fundamental analysis strategy, you will have to carry out extensive research around the commodity that you choose to invest in.
To help you, there are plenty of online resources, such as research reports, released by brokers or the government.
Conclusion
This way, you will find a method that you can incorporate seamlessly into your trading approach.
If you still have any question, feel free to ask me via comments.
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