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Strategies For Commodities Trading
August 21, 2010 by man
Filed under Uncategorized
Commodities are wonderful investment vehicles that are becoming increasingly popular by the day. This is not surprising because as the world develops and population increases, commodities are naturally going to be in demand. However, this is a very long term strategy that might take several decades to unfold. Most investors are looking to make money on this market in the medium to short term. One can either take cash loans or use one’s savings to invest in the commodities market. There are differences that investors need to appreciate between the commodities market and the more familiar stock market, such as the presence of the physical deliverables in the commodities market either with the investor or the broker. Thus, if an investor wishes to be a part of the wheat market, he can buy up 100 tons of wheat and store it in a warehouse and wait for the price of wheat to increase, which is not very realistic for most small investors. Instead, options are traded that promise a delivery at a future date depending on the market. One can also use exchange traded funds for this purpose.
Coming to the commodities trading strategies, one should firstly be clear about the short and long term investment strategies. For example, in the long run, it is usually a good idea to consider precious metals like gold and silver. However, there are certain periods where these metals are in a bubble. This happens when stock markets around the world are doing poorly and investors park their money in the safer commodities like gold. This drives up the prices and creates a bubble that can burst, bringing down the prices in the short term. However, in the long term, the prices of gold and silver almost never really fall.
One important trading strategy commonly used in commodities trading is called range trading. It is a very short term trading strategy and involves identifying the support and resistance level of a commodity. This is technical analysis but in simple words, it means finding out a price range within which the commodity fluctuates in the short term. The higher price is called the resistance and the bottom price the support. The idea is to buy on the support price and sell on the resistance price. Such a strategy works well for short term trading. A lot of investors take cash loans and try out range trading for commodities with considerable success. This is a nice strategy because the profits more than cover for the interest that needs to be paid on the loans and these loans are easier to obtain as compared to bank loans because banks usually do not lend money to investors for the sake of investing.
