CMDTYs Trading Strategies

ETX Capital offers a large range of commodities to trade on within the categories of metals, agriculture, livestock and energy. Here are some key points to consider before starting to trade commodities:

  • 01

    Choose a Commodity That is Right for You

    Different commodities often react in dissimilar ways and have diverse levels of liquidity and volatility. Before you start trading, it is best to research the commodities that would fit best with your trading approach. For example, high volatility means that a market has greater potential to see large shifts, and a trader should be extra diligent to manage the risk of these trades.

    It is highly recommended to have a strategy in place when trading commodities, for example, through taking advantage of ETX Capital’s selection of stop loss orders and limit orders to prevent a portfolio being wrecked by just one or two bad trades in a fast-moving market. Traders should keep in mind, however, that there are different types stop losses and limits, not all of which are guaranteed. If you are unsure about the type of stop you have placed, you can contact the trading desk on +44 (0) 20 7392 1434.

  • 02

    Up-to-Date Information

    One key advantage of trading commodities is that at least some commodities are largely unaffected by the financial markets. This means that the rise or fall of stock markets has little impact on the value of, say, oats. Commodities also differ from stocks in the sense that there is no takeover risk, and have a weaker focus on any kind of quarterly reports.

    However, many factors do significantly affect the supply of commodities, for example, the weather, production strikes, crop and livestock diseases, major oil discoveries, energy prices and emerging technologies. This makes it important for the commodity trader to keep up to date with relevant international news – to aid the trader to respond quickly to sudden events that may significantly affect a particular commodity’s value.

  • 03

    Interrelated Assets: A Domino Effect

    The price movement of some commodities have the potential to shift the values of other related securities. For example, a fall in oil prices (a commodity) in late 2014 resulted in the decreased value of a number of energy sector stocks (equities).

    This is why traders often have a minimum of one commodity in their trading portfolio: this technique can aid traders in their attempts to more closely observe movement within the commodities market that may affect the values of the equities that they are trading.

    This strategy can be particularly beneficial to those with trading experience who have learnt to identify patterns between different markets. However, at the outset it is easy to misinterpret how a particular stock will be affected by a certain commodity’s price movements, and beginners must be wary of making rash decisions based on a speculated relationship between a particular equity and commodity.

  • 04

    Safe Haven Assets

    Certain commodities, such as precious metals, are used by traders as ‘safe haven’ assets. ‘Safe’ commodities are those that either have a steady demand (for example, food), a restricted supply (such as gold), or simply cannot increase in supply at a rate fast enough to meet increasing demand (for example, coffee and cocoa). Safe commodities are viewed to have a greater degree of stability than other securities.

    Amongst commodities traders, gold has had a strong reputation as a ‘safe haven’ asset in the past, offering a sense of security to investors. Many investors have relied on gold to generate profit during times of crisis – such as failing economies, rapid decline of currencies, or war – when returns from a traders’ open positions on other securities may well have reacted negatively.

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