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Learn How to Trade Commodities Like a Pro

June 10, 2020 by Daniels Trading| Tips & Strategies

For anyone interested in learning how to trade commodities, there are several essential areas of study. First, it’s critical to select a market that is conducive to success. After that, buying and selling contracts efficiently is the name of the game.

The basics may sound easy, but expertise is required to become a consistently profitable commodities trader. In this blog article, we’ll cover the ins and outs of choosing a market and a few ways that the pros identify buying and selling opportunities.

Choosing the Proper Market Is Job No. 1

Featuring robust liquidity and inherent volatility, commodity futures are attractive financial instruments. However, they aren’t all alike. To capitalize on the upsides of these exciting products, professional traders understand that each contract is nuanced and offers unique opportunities.

If you want to learn how to trade commodities, the first step is to know your contract. Here’s a quick look at the divisions of commodities available on the Chicago Mercantile Exchange (CME):

Asset Class Products
Agricultural Corn, soybeans, live cattle, lean hogs
Metals Gold, silver, copper
Energy Crude Oil, natural gas

Aside from the equities indices, metals, energies, and ag products are among the most popular commodities. Each contract can serve a variety of purposes, and they are useful for speculative, hedging, and portfolio diversification purposes.

Read tips and tricks compiled from the advice of experienced futures brokers in our e-book:Basic Training for Futures Traders

Going “Long” the Market

If you’ve ever been to the grocery store, then you are familiar with buying commodities. Corn, wheat, beef, and pork are all commodities. But trading financial instruments based on these products is a bit different.

As the old saying goes, you make money when you buy something, not when you sell it. So how do you know when to buy or “go long” a given market? Well, that is the trillion-dollar question.

Basically, identifying when to buy a commodity boils down to finding value. For instance, on April 20, 2020, May West Texas Intermediate (WTI) crude oil futures traded at a low of $-37.63 per barrel.

Pretty much everyone in the markets agreed that oil was worth something―those who bought May 2020 WTI at the right time rode a vicious $45.00 24-hour rally to a close just above $10.00 on April 21. Though the action in WTI for April 20-21 was extremely rare, it is a valuable curriculum for anyone learning how to trade commodities.

“Shorting” the Market for Big Gains

Compared to trading stocks or ETFs, commodity futures offer distinct flexibility. Simply put, the name of the game isn’t only buying low and selling high; you can make just as much money selling high and buying low.

For individuals new to the market, the idea of “shorting” is a bit counter-intuitive. However, it really isn’t much different from going long. The key is to identify value, enter the market efficiently, and align risk to reward. Here are two kinds of contracts that professional traders view as shorting opportunities:

  • Overbought: A commodity contract may be considered overbought in a variety of ways. Some of the most common ones can be identified through the implementation of momentum oscillators such as stochastics or the relative strength index (RSI).
  • Inflated: Inflation is a tricky topic because the word carries a number of meanings. However, a commodity’s price can become artificially inflated because of breaking news, rumors, or a black swan event.

Much like “going long,” shorting the market successfully is all about spotting value. If a commodity is overbought and artificially inflated, then “going short” can be a profitable endeavor.

Once again, the April 2020 action in May WTI crude oil is a prime example of when to short a commodity. A major supply glut and limited storage capacity led to an unprecedented crash in oil pricing. Traders with foresight sold May WTI before the contract expired, and the results were windfall profits and a lesson in how to trade commodities for big gains.

Want to Learn More About How to Trade Commodities?

For those new to the futures markets, commodity trading can be intimidating. Choosing a market and identifying when to buy or sell are important decisions. To get off on the right foot, drawing from the experience of a market pro is a solid way to begin.

To learn more about commodity trading, check out the online educational suite at Daniels Trading. Featuring webinars, trading guides, and blog content, it’s your one-stop shop for all things futures and commodity trading.

Basic Training for Futures Traders

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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