Commodity contracts are full of trading opportunities and in this article you will get some basic ideas to how they can be traded. To begin some of the most commonly traded commodities are:
- Corn
- Wheat
- Rough Rice
- Soy Beans
- Oats
- Soy Bean Oil
- Feeder Cattle
- Live Cattle
- Lean Hogs
The above are the more actively traded commodity contracts but there are other commodities that traders can trade. For most traders they are two main techniques used for trading commodity futures:
- Technical Analysis
- Spread Trading
Technical analysis is the most common way for traders to trade commodities. It is a simple way to look at the market and there are many tools available to help analyze data. Some basic technical analysis techniques are buying when a price breaks a new high, buying at support levels or any type of price based analysis.
One of the best indicators to trade commodities is the Shift Theory Ratios because they break down the trend of a chart by focusing only on the data that counts. Many other technical analysis tools have latency issues and a lot of false signals. The Shift Theory Ratios solve those issues and at the same time break down the trend into easy to understand color codes. Green lines measure up markets, red lines measure down markets and the yellow line tells you when not to trade.
Another popular way to trade commodities is to trade spreads. What most people don’t know is professional traders are mostly spread traders. A spread trade is where someone does not care about the direction of the market. A spread trader is interested in the relationship between two symbols. For example a common spread trade is wheat verse corn. Both of these move together because their fundamentals are very similar. The theory is this. If corn gets too expensive then people simple switch to wheat. So both of these prices stay close together at all times. What a spread trader does is wait for one symbol to get to far away from the other symbol. Once that happens they sell the higher priced symbol short then buy the lower price symbol. What they are capitalizing on is that the difference in price will get smaller and then they make a profit. For example if the difference between corn and wheat is $20 and then it becomes $10 a week later. That will result in a $10 profit. What is so great about spread trading is market direction does not affect the trade. Let’s say that the symbol we sold short goes higher than the symbol we went long will make up any loss for the short position. Other terms used for these types of trades are pair trading, hedging, spreading, ratio trades and many others. The main point is the market direction does not matter because the trader is profiting from the spread relationship. Any losses are usually offset by the other positions gain.
My name is David Zielinski and I am the creator of Shift Theory. Home of the the best commodity trading indicators, period!
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