Commodity Futures Trading Strategies

Many traders seeking to diversify their portfolios choose to get into commodity futures trading because it represents a significant opportunity for them. However, like all forms of trading, it comes with just as many risks as potential rewards. Getting involved in the commodity futures market is not something that should be undertaken lightly — it requires a lot of education, research, and a trading plan to be successful.

Fortunately, there are a number of commodity futures trading strategies that beginning and seasoned traders alike can leverage to get started on the right foot. Understanding how these strategies work and how they may fit into your personal trading style and comfort level is important if you want to have the best possible experience in the futures markets.

What is commodity futures trading?

In simple terms, a commodity future is an agreement between two parties to buy or sell a specific commodity at a specific date in the future. The price and quantity of the commodity to be bought or sold are set at the time of the agreement. Commodities include precious metals, agricultural products, livestock, and natural resources such as oil and natural gas.

Many of those who participate in trading futures for commodities are the producers and manufacturers of the commodities and products we use every day. There are also futures traders who are looking to speculate on anticipated price changes as market prices move up and down.

Beginner Commodity Futures Trading Strategies

If you’re looking to get your feet wet as a commodity futures trader, the first thing you’re likely to discover is that there’s a lot to learn. With so many different strategies and commodities to choose from, the commodity futures market can be daunting for the uninitiated.

At the start of your journey, it’s best to do a little research and make a few decisions based on what you expect from the experience and how comfortable you want to be. Some common types of futures trading strategies used by beginners include:

• Long-term: Buying or selling based on the long-term outlook for a particular industry can be a good way to break into the commodity futures game. However, in most cases, this approach requires patience before returns will be seen. You may ask questions like: What does the foreseeable future hold for the price of crude oil? Is investing in oil futures a good idea given the rise of renewable energy sources? Does the current price of beef make it more or less likely consumers will continue buying as much in the months to come?
• Short-term: On the other hand, price fluctuations from week to week or even day to day can also provide a beacon for traders. Sudden drops in prices on commodities may represent a good opportunity to buy in anticipation of an equally sudden correction. Likewise, prices that increase dramatically in a relatively short timeframe could be your signal to sell. Although there are some advantages to this approach, such as quick returns, it’s also much more volatile.
• Price extremes: Paying attention to market history, you might see a particular commodity’s price fall within a specific price range. Based on that information, you can set buy and sell orders based on when prices fall below or above the limits of that price range. The downside to this strategy, however, is that it can lock you into waiting for certain conditions that may not manifest.

Advanced Commodity Futures Trading Strategies

Once you settle into the futures markets, you may feel comfortable enough to start utilizing more advanced techniques to guide your strategy. It should be noted that any strategy carries with it the risk of losing money, so keep that in mind before you create your plan.

Some of the advanced strategies many traders use once they get up to speed include:

• Trading the range: If you notice that the price of a specific asset tends to fluctuate between an established high and low for an extended period, you may be able to trade the range. This means buying when the asset hits its recognized low and selling when it reaches its expected high. Range trading allows you to leverage your knowledge of the market, but some may find it too limiting.
• Breakout trading: Almost the opposite of range trading is breakout trading. This means taking advantage of market volatility by entering a position when you notice the price of an asset is breaking away from established patterns. Many traders use this strategy because breakouts tend to accompany increases in trading volume, increasing the potential for success. The downside to this approach is that it relies on the same volatility that can wipe out gains in the blink of an eye.
• Pullbacks: Whenever the market trends in one direction, there are bound to be moments when traders briefly reverse course. These could be in reaction to breaking news or unexpected movements in certain assets. Traders can take advantage of these momentary shifts by using them to jump into a position. The major risk in this strategy is that pullbacks often herald a trend reversal that can hurt the market.
• Counter-trend trading: Experienced traders may be able to put this futures trading strategy to good use. It involves taking a position opposite a trend. If an asset is trading upward, this may be a good time to sell. This approach can lead to big rewards, but it also requires a lot of quick thinking and good luck.

Risk Management Techniques

Just as important as the commodity futures trading strategies you use is how you plan to lessen your risk. Managing your exposure is critical for ensuring the best results and giving you more stability. When crafting your trading plan, you should consider employing one or more of the following risk management strategies:

• Diversification: By spreading your investments over a broad range of commodity types, you can insulate yourself from sudden price fluctuations in any of them.
• Stop-loss orders: If you establish preset price levels at which you automatically sell a future, you can avoid losing a lot if the price crosses your sell threshold.
• Position sizing: One way to protect yourself is to size your investments according to the risks associated with each asset, rather than investing the same amount in each.

Start Your Commodity Futures Trading Journey Off Strong

Trading commodity futures can be an exciting and rewarding investment experience, but it’s important not to get in over your head. If you’re interested in this type of investing, NinjaTrader offers a wide range of tools and resources to help you start from a strong position. Our insights and advanced analytics provide valuable information you can use to plot your course. Get in touch with us today to learn more about how you can get started with our powerful, award-winning trading platform.