You would consider the weather factors that would influence the future crop. Most of these factors might coincide with another agricultural crop, say soy.

It is also dependent on the various factors like weather, political policies, etc. Therefore, you would be able to predict the trends in soy by using the same or similar principles that you used for wheat. However, if instead of soy you were to go for a very diversified commodity, like say Crude Oil, your prior analysis of the former commodity might not work that well for you. The supply of crude oil is maintained by the Middle East and its demand is dependent on various other factors.

It is a totally different area than wheat. Therefore, you would need to do a whole new set of research for crude oil and develop its own trading methods. This can cause a distraction for you, missing out on either one or both of the commodities. If you take the case of the successful commodity traders, they all trade in one commodity or a particular sector of commodities.

You can apply this strategy for yourself and see the results in real time! Also Read : Swing Trading Strategies. Commodity trading is basically based on supply and demand. If the supply increases, the demand would decrease and the price would consequentially decrease as well. If the supply decreases, the demand would increase and the price would soar high.

With this logic, you need to do in-depth research about the commodity that you are looking to invest in. When trading in any type of commodity, you need to understand its origin as well as its consumer base. All factors that influence the creation and supply of the commodity should be accounted for.

Further, the future demand for the commodity needs to be considered as well. Take the example of soy crops. Soy crops require a lot of water to flourish. If there is an expected scarcity of water, the supply of soy crops is going to reduce drastically. This means that the price of soy is going to climb high. Also, consider the situation of crude oil.

For a developing economy like India, crude oil is a valuable resource. India is one of the highest consumers of crude oil and its demand is going to increase even more in the future. Talking about the supply of crude oil, it is manufactured in the Middle East. Therefore, various political factors at play there can influence the supply of crude oil.

The strategy in detail

Understanding these supply and demand factors can enable you to make considerably better trading decisions. Take note that this step involves doing thorough research. Most beginner traders make the mistake of ignoring this strategy due to the hard work and patience it involves.

However, applying such commodity trading strategies in your trading is going to effectively make long term profits for you. You can apply the strategy right now. Choose any commodity of your choice probably you have already chosen! Start researching the fundamentals of that commodity. Note down its creation, factors that influence it, its demand, and every other fundamental aspect related to it.

When you trade the next time, you can take into account the research that you have done. You will begin to see how it will positively affect your trading outcomes. Scalping is the practice of making profits from minor fluctuations in prices. A scalper makes minor profits from small changes and exits before any loss could negate the profits that are made. In scalping, you decrease the amount of profit per trade while increasing the number of successful trades. Traders can generally create profits by winning just about half of the trades they make if have the winning amounts considerably higher than the losses.

However, if you are successful in scalping, you will have a high win to loss ratio of the number of trades you have accomplished. Commodities trading is a trading strategy that focuses on physical goods used in the production of other goods and economic services. Goods that are commodities exhibit common characteristics such as a lack of differentiation and fungibility.

Commodities comprise a significant portion of production costs for industrial organizations. As such, companies seek to control their costs and manage financial risk by employing commodities trading strategies. Commodities are traded in the spot market or packaged as derivatives and traded over the counter or on exchanges. Managed futures funds and commodities trading advisors CTAs are active investors in this asset class. A practical implementation approach involves modeling, building, and testing commodities trading strategies using data gathered from data feeds and databases. An effective workflow enables you to:.

As its name implies, the London Metal Exchange only deals with metals. In the broadest sense, the basic principles of supply and demand are what drive the commodities markets.

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2. Commodities Trading!
3. What Are Commodities?!

Changes in supply impact the demand; low supply equals higher prices. So, any major disruptions in the supply of a commodity, such as a widespread health issue that impacts cattle, can lead to a spike in the generally stable and predictable demand for livestock. Global economic development and technological advances can also impact prices. For example, the emergence of China and India as significant manufacturing players therefore demanding a higher volume of industrial metals has contributed to the declining availability of metals, such as steel, for the rest of the world.

Commodities that are traded are typically sorted into four categories broad categories: metal, energy, livestock and meat, and agricultural. Metals commodities include gold, silver, platinum, and copper. During periods of market volatility or bear markets, some investors may decide to invest in precious metals—particularly gold—because of its status as a reliable, dependable metal with real, conveyable value. Investors may also decide to invest in precious metals as a hedge against periods of high inflation or currency devaluation.

Energy commodities include crude oil, heating oil, natural gas, and gasoline. Global economic developments and reduced oil outputs from established oil wells around the world have historically led to rising oil prices, as demand for energy-related products has gone up at the same time that oil supplies have dwindled. Investors who are interested in entering the commodities market in the energy sector should also be aware of how economic downturns, any shifts in production enforced by the Organization of the Petroleum Exporting Countries OPEC , and new technological advances in alternative energy sources wind power, solar energy, biofuel, etc.

Livestock and meat commodities include lean hogs, pork bellies, live cattle, and feeder cattle. Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar. In the agricultural sector, grains can be very volatile during the summer months or during any period of weather-related transitions. For investors interested in the agricultural sector, population growth—combined with limited agricultural supply—can provide opportunities for profiting from rising agricultural commodity prices.

One way to invest in commodities is through a futures contract. A futures contract is a legal agreement to buy or sell a particular commodity asset at a predetermined price at a specified time in the future. The buyer of a futures contract is taking on the obligation to buy and receive the underlying commodity when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying commodity at the contract's expiration date. Futures contracts are available for every category of commodity.

Typically, there are two types of investors that participate in the futures markets for commodities: commercial or institutional users of the commodities and speculative investors. Manufacturers and service providers use futures contracts as part of their budgeting process to normalize expenses and reduce cash flow-related headaches.

Manufacturers and service providers that rely on commodities for their production process may take a position in the commodities markets as a way of reducing their risk of financial loss due to a change in price. The airline sector is an example of a large industry that must secure massive amounts of fuel at stable prices for planning purposes.

Because of this need, airline companies engage in hedging with futures contracts.

Future contracts allow airline companies to purchase fuel at fixed rates for a specified period of time. This way, they can avoid any volatility in the market for crude oil and gasoline. Farming cooperatives also utilize futures contracts. Without the ability to hedge with futures contracts, any volatility in the commodities market has the potential to bankrupt businesses that require a relative level of predictability in the prices of goods in order to manage their operating expenses. Speculative investors also participate in the futures markets for commodities. Speculators are sophisticated investors or traders who purchase assets for short periods of time and employ certain strategies as a way of profiting from changes in the asset's price.

Speculative investors hope to profit from changes in the price of the futures contract. Because they do not rely on the actual goods they are speculating on in order to maintain their business operations like an airline company actually relies on fuel , speculators typically close out their positions before the futures contract is due.

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