What is commodity trading strategies and its types?

A place where buyers and sellers can trade any homogeneous good in bulk is called commodity market. Commodity market gives endless opportunities to make profit. However, due to the complexity it is very risky too. Therefore, commodity traders prefer taking commodity tips before investing in commodity market. To earn profit constantly and to make more efficient investments traders should follow trading strategies.

Trading strategies can be defined as the plans for buying and selling commodity futures and options to earn profit from movements in their prices. Using a trading strategy can help you to minimize the risk factors. It is one of the most important task for all the traders to construct a strategic plan before you begin trading commodities and putting your capital at risk.

A trader will not get the necessary skills to succeed in the commodities markets only by watching the financial news and reading a commodity newsletter for the latest trading tips. However, consistent strategies that you test over time will allow a trader to understand risk and reward as well as the volatile nature of markets.

When it comes to entering and exiting the risk positions in futures and futures options markets, technical analysis is employed in many commodity strategies mainly for this purpose. Supply and demand analysis is a critical compliment that will help a trader to avoid unexpected changes that tend to occur when it comes to the changes in output and consumption in raw material markets.

Most of the commodity trading strategies revolve around either a range trading or breakout methodology.

Range Trading Strategy-

In commodity trading, range trading in commodities simply means attempting to make purchases near the bottom end of a range i.e, support and selling at the top of that range i.e, resistance. The successful result of this strategy depends on the ability to buy a commodity after selling makes the price fall to an oversold condition. In this, oversold condition means that the market has absorbed all the selling and buying is likely to move out.

There are various and well known indicators which measure the overbought and oversold levels like the Relative Strength Index, Stochastics, Momentum, and Rate of Change metrics. When the market has no definable and consistent trend this strategies works very well. The main risk of range trading is that the market moves below technical support or above the resistance.

Trading Breakouts-

In the world of commodities, a strategy that focuses on trading breakouts that means a trader will look to buy a commodity when it makes new highs or sell a commodity as it makes new lows. One can use charts to understand this because new highs and lows can easily be spotted on a chart. These techniques are used by many commodity traders when they are investing large sums of money and looking for a major trend to develop and to earn maximum profit.

Trading strategies can be very helpful in earn more profit with less chances of risk. Every strategy has its pros and cons, so it is up to the trader to choose which type of strategy will work best for him. Many traders have started taking services from well known and genuine stock market advisory. So, that they can get best investment ideas before investing in market.

I am interested in financial market so I wrote my article on the commodity market. The market is very interesting and once you understand how it works you'll like it too.