Having started my career as a commodity trader and analyst, trading raw materials has never particularly bothered me. I realise much of our industry’s growth has been driven by the attraction of other instruments, especially those that are easier to trade through online platforms. However, now that commodity CFDs are widely available, I would urge more traders and investors to follow these markets and use them to diversify their portfolios.
I would also encourage people to look beyond oil and gold. Opportunities can appear anywhere.
Back in early June, we discussed buying various commodities on dips, particularly grains and metals. Since then, we have seen some very respectable rallies of between 10% and 20% across a range of markets. Over the same period, many equity indices and currency pairs have barely moved – if at all.
Having been at the sharp end during the early development of online trading platforms, I understand why they proved such a success with over-the-counter foreign-exchange trading. I also enjoyed a long spell as a dealer at the bank, when Stock CFDs first appeared on our screens for us to play with.
But now that we can trade commodity CFD’s without having to navigate commodity futures exchange-traded instruments – with all their strange little quirks – it amazes me that so few traders and speculators involve themselves in the many potentially lucrative commodity markets available.
Of course, there are some valid concerns. Some commodity markets are less liquid than the major indices or currency pairs. Many of the underlying futures markets also close for extended periods, potentially increasing slippage when stop-loss orders are triggered.
These are perfectly reasonable considerations. However, having traded commodity futures for more than 50 years, I can assure you they are factors you can learn to accommodate.
When I worked as a floor trader in the late 1970s, we would swing-trade throughout the day. Now that I am older – and working a long way from the front line – my approach is more measured. I prefer to trade commodities with the intention of holding positions for a week or even longer.
Commodity prices are heavily influenced by supply, demand, and fundamental developments. Nevertheless, a competent technician – someone confident in their chart-reading skills – can still earn respectable returns from speculating in these markets.
“Professional” commodity traders and dealers will discuss growing seasons, crop yields, planting conditions, weather patterns, and a host of other factors. All these things matter and can affect prices.
However, if your trading decisions are primarily based on chart patterns and technical indicators, you do not need to become an agricultural scientist before getting involved.
Let’s be honest: if you trade other markets using charts, you probably don’t need a doctorate in economics every time interest rates change, or unemployment figures are released. Even if plenty of commentators like to pretend otherwise.
Sorry, but we all know most commentators are clever after the event, not before the move. That’s simply how it is.
Another good reason to monitor commodities is that every sector or market experiences dull or uncertain periods. Trading through these conditions can often produce more losses than usual, mainly because traders become bored and start forcing positions that aren’t really there.
During such periods, you may find much clearer opportunities in one or two commodity markets. Those opportunities could improve your bottom line instead of a drain on it.
While I am openly encouraging traders to study commodities and become more comfortable with them, I am not suggesting you jump in immediately with both feet and maximum leverage. That would be daft.
Instead, use part of the holiday period to study these “new” markets. Watch how they move. Learn their trading hours, volatility, and contract specifications. Understand the risks, practise with smaller positions, and gradually add another string to your bow.
At the end of the day, successful trading is not simply about becoming exceptionally good at trading one instrument or market. It is about becoming good at finding worthwhile opportunities – wherever they appear – and having the knowledge, discipline, and confidence to exploit them sensibly.
The market does not care whether your profit comes from the S&P 500, EUR/USD, copper, wheat or a field full of soybeans.
Profit is profit.
Good luck!
Please note the political opinions expressed above are those of the author himself, and do not necessarily reflect the opinions of JP Fund Services AS.
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