Commodity trading is an important way for many individuals and companies to attain a regular cash flow in their business. Although there are many risks, it's still possible to use commodity trading to increase revenue, reach more consumers and even gain access to the market through the commodities being shipped or traded in futures contracts.
What to watch for While Investing in Commodities
The moving average for commodity trading strategies
One strategy for trading niche markets is moving average costs. Investors use this strategy to analyse the market trend and other essential items like support rates and resistance points.
Supply and Demand Rule
Understanding demand is crucial in any commodity market, and the more you can anticipate how it will evolve, the better (even if we know spikes in demand can happen overnight). When demand increases, so do price. It's simple supply & demand. However, there are other elements to consider, such as marketing and supply management when setting a product's retail price. Many commodity industries are also prime examples of perfectly competitive markets; however, they are passive by nature because producers generally don't need to worry about consumers being able to differentiate products available on a large scale due to commodities being largely homogenous.
While some traders use daily technical or fundamental analysis to speculate, the most common strategists employ quantitative strategies based on algorithms that automatically scan huge amounts of historical data. The maths scans for historical patterns such as price trends, frequency of occurrences and volume at various times to predict what will happen next. Based on these predictions, these traders may enter the market with a predefined set of orders. This allows them to maintain large positions while reducing their exposure to counterparty risk by only entering into trades that they initiate themselves.
Lowest Cost Wins in Commodities
There are two types of companies: those that work with raw materials and those that build their components. The former compete on price since they have no control over the market price—because they buy their raw materials before the market has an idea of how much each material is worth. Generally, companies that win in this space make more on each commodity unit than anyone else in the field. The latter, however, also must take into account something—cost. So they either create their parts or are smart about only buying parts for less than 10% above cost per volume yield; otherwise, if the market suddenly reverses direction and goes down instead of going up, they'll lose money from poor planning or making bad decisions earlier and will go out business instead of learning from such unforeseen circumstances to be better prepared next time!
Price spikes are often short-lived.
Commodity prices can be extremely volatile – and that's bad news for companies who either process or produce commodities. They will sometimes see short-term price spikes or declines that make it impossible to remain profitable. However, the problem is temporary, and the price volatility is a natural part of how commodity markets work. Over Corrections that occur as a result of price, volatility is what keep supply and demand in line with one another, so business owners should adjust their cash flow accordingly by taking time off, working less, or hunkering down if there's an impending disaster (i.e. Christmas is around the corner).
Similarly, suppose producers react too quickly by flooding the market with products. In that case, there will be far more supply than consumers need, which pushes prices down so low that production loses its profitability. So the swings in commodity strategies prices are often short-lived and represent a “shaking out” of marginal suppliers that lack the capacity or willingness to produce at an efficient rate.
Source URL: https://go.commoditiesuniversity.com/day-trading-futures-made-easy
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