The commodity options and futures trade market offer a trader a myriad of opportunities to earn profit from the price fluctuation. However, it is crucial to implement a tried trading strategy for consistent success.
There are many commodity trading strategies, which got developed and underwent rigorous testing. New commodity traders need to understand basic strategies before they enter the live market and put their hard-earned cash at risk.
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Technical metrics and analysis are the foundation of every trading strategy. They offer alerts when to enter or exit the trade position. Every strategy has its procedure for incorporating the technical indicators and guidance it offers.
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Trading strategy types
Range trading
It is a strategy that uses charts with support & resistance level like Bollinger Bands. It involves buying at a support level when price movements are at the bottom range and sell at a resistance level when the price is at the top range. The tops and bottoms are extremely influenced by supply and demand.
Commodity prices reach a peak when demand forces the price to a hew height. On the other hand, the price collapses to the bottom as traders sell the supply increases. Understand overselling when you watch the bottom range because the commodity price has reached below its estimated value and a rebound will possibly occur.
When clear trends are hard to evaluate many traders use stochastic, strength index, rate of change, and momentum. The drawback of range strategy is experienced when the market stays oversold or overbought for a long time, which makes it hard to decide a time to take an entry or exit position. There is also a risk that the price may move beyond the anticipated support & resistance level.
Breakout
In this strategy, you can capitalize on the short-term movements. The trader seeks to profit from buying before the price moves high or sell before the price starts to fall. You can use the Breakout strategy with range-trading but is not constrained to the support & resistance ranges. Breakouts happen anytime, so it is crucial to identify the breakout and profit from price moving high or low.
It is a strategy that works great when trends are long-lasting and strong. You can earn profits on any kind of trend up or low. The drawback of this strategy is poor when the market is unable to establish solid short-term trends.
Fundamental trading
In a fundamental strategy, market factors are considered instead of technical dynamics. For example, if India announces a rise in oil demand then expect the price to increase. The traders can go for a long position to gain from news breakout.
The drawback of fundamental trading is it needs more research. Fundamental positions need more patience and time, while technical patterns offer fast returns if identified correctly.
