Commodity Trading Goes Back To The Future

The course is authored and conducted by QuantInsti Quantitative Learning Pvt. Whenever the market strays from what are considered average prices, contrarians might get on the other side of the recent trend potentially profiting from the market reverting to average prices. For example, if the average price for crude oil is $70 and the market recently rose to $110, then a contrarian trader might sell crude oil futures looking for the price to fall back to normal prices.

As a rule, We advise traders to perfect their art of trading in one or two asset class. For instance, if they are good at currency trading, then they should focus on it. The same way, if they are perfect at commodity trading, we always recommend that they stick to commodities. To trade in a particular commodity, you should conduct comprehensive product research. If you are trading in two highly diversified commodities like oil and silver, you can be distracted from both.

What is Commodity trading?

In terms of commodity futures trading strategies, some scholars have proved that the trading strategies applicable in the stock market are also applicable to the commodity futures market. The other scholars have explored some unique trading strategies of commodity futures based on the characteristics of commodity futures. In commodity futures related research, the above trading strategy is also called investment style. According to Bakshi et al. (2019), the momentum strategy is related to the aggregate speculative activity, and the carry strategy gains a positive risk premium because of its exposure to innovations in global equity volatility. In addition, Ready et al. (2017) relate commodity returns to the returns of carry trade strategies in foreign exchange markets. The inventory theory and hedging pressure hypothesis explain the link between commodity spot and futures price from different perspectives.

Commodity trading refers to the buying and selling of certain assets in the market. These assets can be either physical (e.g., gold, oil, wheat) or financial (e.g., stocks, bonds, currencies). For example, the introduction of futures contracts gave buyers and sellers additional freedom by allowing them to fix their pricing in the future. This protects them from price fluctuations while also allowing them to plan over time, decreasing their risk to factors that might affect trade flows, such as weather or international conflicts. Commodities are also short-term investments, particularly if you enter a futures contract with a specified deadline.

Special characteristics of the commodities market

Another of the commodity trading secrets is paying attention to a factor that is unique to commodities as opposed to other investment vehicles and which tends to significantly drive prices – seasonality. Nearly all major commodity markets tend to follow established seasonal price patterns. Both of these commodities tend to, year in and year out, rise into the winter months when demand is highest and decline into summer as demand falls off. There’s another good Commodity trading strategy reason to employ a solid, long-term, trend trading strategy when investing in commodities. While commodities do tend to enjoy long-term trends, on a daily trading basis they tend to be just the opposite – excessively volatile. Day trading commodity futures – because of the leverage available which makes even small price fluctuations significant as far as potential profits or losses on any given day – do indeed offer tremendous opportunities for profits.

This specific strategy uses moving averages to confirm the direction of the trend with additional confluence from the Relative Strength Index (RSI). In the past, early civilisations had to buy and store these goods physically, but nowadays, there are many types of commodity trading available. Commodities trading is a trading strategy that focuses on physical goods used in the production of other goods and economic services.

When is the best time to trade commodities?

Conversely, if demand falls and there is more aluminium available on the market, sellers will reduce their prices to attract buyers. One of the major challenges is learning how to take advantage of the leverage offered without exposing yourself to excessively high risks and potentially disastrous losses. Because, frankly, that’s the sad story of many who try their hand at the commodity trading game – they lose.

Neither strategy is fool proof – both can be profitable but can also generate losses. There are CTAs with very long and successful track records in each category. A true systematic CTA will rely solely on the buy and sell signals generated by their computer model. All human intervention and guess work or trading from the gut is eliminated.

Demand and supply

It is often unclear if anticipated relationships between data feeds and commodity prices actually exist; and even if they do, it is not certain the volume of data is sufficient to make meaningful predictions. For example, it is incredibly difficult to analyze global satellite imagery to identify precisely the daily flow of commodities, given the frequency with which images are being taken. Depending on the specific market, these signals are often also relatively limited compared to just market sentiment when forecasting in the horizon of interest. The Chinese futures market and the US futures market, the as the world’s most important commodity futures trading market, there are many differences between them. In terms of the trading system, the Chinese market has strict restrictions on investors’ arbitrage behavior, and there are quantitative restrictions on the trading volume of the nearby contracts. Therefore, it is meaningful to analyze and compare the role of commodity futures in trading strategy and portfolio investment in the two markets.

Discretionary CTAs are nearly the exact opposite – trading decisions are made at the discretion of the portfolio manager. Again, they can be based on fundamentals or technical, but a human is at the heart of the trading decision. https://investmentsanalysis.info/ While the term “gut feeling” arises when talking about discretionary traders, most discretionary CTAs have very elaborate trading strategies based on solid research as well as very precisely defined risk management strategies.

J. Int. Financ. Mark. Inst. Money

Your chances of prosperity are always higher when the trend is on your side. However, you should also be aware that CFD trading carries risks as CFDs are leveraged products that use margin. This means they not only increase gains if the price moves in the same direction as your position but also increase the size of losses if the price moves against your position. It is very important to do your own research to understand how leverage and margin work before you start trading CFDs. Whether you have a positive or negative view of the commodity price forecast, you can speculate on upward or downward future price movements. Price action trading is well suited to quick decision making as traders do not need to wait for signals from technical indicators that can lag behind price movements.

However, to do so, many may need to enter joint ventures or partnerships to achieve sufficient scale to monetize their advantage. At the same time, these traders will have to continue to lower costs and investigate operating and commercial models that give them an even bigger bang for the buck. Developing topnotch predictive analytics often requires setting up data science teams in a way that they can operate differently from traditional commodity trading organizations, while remaining deeply linked. So commodity traders are establishing incubators, entering joint ventures, and striking partnerships with consultancies and universities. In some cases, they are even pioneering ways that they can monetize proprietary intelligence outside of their own trading and sales activities. So traders are forced to do more and more to gain an edge by further increasing their scale.