Looking at fundamental commodity trading

We have indeed discussed the types of strategies one can employ when trading commodities quite recently. This included range trading and trading breakout strategies. The strategies we looked at involved using mostly technical indicators to establish the best places to invest in, so with the aid of price chart information. One had to, broadly speaking, look for places with low investment that might at some point experience more investment. One wants to start investing in an area just before it becomes popular and raises its price. The opposite is also true if one short-sells a commodity, betting against its performance. All this does still remain true with a further strategy that we shall introduce, fundamental commodity trading. This type of trading is a bit more advanced and involves more speculation. Therefore, we would recommend a new commodity trader to avoid such strategies at first.

Fundamental commodity trading

Fundamental commodity trading means taking a view outside of charts and previous prices to guess what the future holds. It means taking into account how the world is currently functioning and how demand for commodities can adjust accordingly. For example, the time of year can have a profound effect on what is available. In the wintertime, it is quite likely that certain agricultural commodities will generally be not as available and in demand yet. However, we live in a global economy now, and though it may be winter in one area of the world, such a commodity may still be growable in other parts of the world. A trader’s job is to figure out the most optimal time to choose a commodity.

Getting one’s feet stable with such a fundamental commodity trading can be a tad difficult. It has a much broader set of problems than what one may be used to with the comparatively narrow technical trading. Due to the fact that there is more speculation, one needs to behave differently. Trading commodities 24/7 will not work, one has to wait and see if your predictions come to fruition.

Fundamental commodity trading indicators

What can you be looking for when using a fundamental commodity trading strategy? There are actually quite a few things. The overarching idea is to look for where the supply is and where the demand is. As we said, supply can change according to the time of year for commodities, or because they are generally running low. Demand follows how people value a commodity. This may be if a commodity is highly useful for many applications, is very desirable (in the case of food), or is a high-status symbol. However, these two factors affect each other as well, since a lower supply usually raises demand as well.

The sources can be all over the place, from analysts’ opinions to blogposts and the real news. One has to personally summarise all such news and decide what they think will most likely happen. However, past trading prices can still be useful to affect a trader’s opinion. For example, if we are talking about agricultural commodities, we may have a seasonal cycle over a year. This means that if one looks at the past, one should, hopefully, see how prices were affected in similar environments. Of course, this is all relative, and one should keep in mind the exact conditions of the time you are checking and how it relates to your time

Short-term opportunities

Despite what we did say about patience with fundamental trading, you can still do well in the short-term under certain circumstances. Such price changes usually have to do with sudden shifts in perspectives on a commodity. So, for example, how analysts scrutinise the market has an effect on future prices. Despite the hopes that analysis would examine the market from afar, they often have an effect and become self-fulfilling prophecies. This is especially true when it comes to respected analysts that hold great respect. In such a situation, it is easy to see why quick, decisive action may be advantageous.

Taking advantage of such opportunities is thus known as momentum trading. It is more effective in highly volatile markets, where opinions will be driven by more speculation and sudden changes. This means, if one plays their cards right and has a little bit of luck, they can do very well quite quickly.