Commodity trading – 5 Essential tips to help you

December 7, 2012

Commodity trading essentially takes place in the markets that deal with primary or raw products. These products are then traded through exchanges of regulated commodities. As for the commodities, then they’re physical substances like lumber, oil, metals, food and likewise. These are traded by the investors through the futures contracts. Investors mostly trade in these items so that they can gain out of the fluctuating prices.

5 Essential tips for commodity trading

Enlisted below are 5 essential tips that you can make use of in case you’re planning to get into commodity trading.

1. Time frame involved: The idea of trying out different time frames is a good one. Only when you’ve tried out the different time frames will you be able to choose which one’s the best one for you. As an investor you’ll need to choose the time frame that you’re most comfortable to work in. The time frame’s important for various purposes like the idea of analyzing the market, placing as well as closing orders. It’s advisable that you select a higher time frame because that’ll give you a bigger picture of the market price movements.

2. The risk reward ratio: Keep this in mind always that when the probability to win a trade as compared to the probability of losing one is smaller, then it’s important that you don’t trade at all. It’s important for you to assess the risk reward ratio prior to getting into the commodities trade. The ratio of 1:2 is considered good at the lowest level, however 1:3 or more is considered even better. This means that the chances of losing are 3 times lesser than your chances of winning. Taking the right trading decision isn’t easy, especially in the face of the global economic meltdown which affects the commodity costs to a great extent. Hence the risk reward ratio is so very important.

3. The trend lines: It’s a good idea to draw trend lines always. Trend lines happen to be one of the simplest yet powerful tools that you’ve got as a commodity trader. A trend can basically do 3 things – Firstly, it can go up, it can also go down, and apart from these it can go sideways as well.

4. Trend as support or resistance: After you’ve determined the trend, then you could make use of the line as support or resistance. Say for instance, the market goes up and it falls down again on the trend line, then there are chances that it’ll bounce off the trend line and carry on moving up.

5. The three indicators: It’s advisable that you use the three indicators to confirm your entry into the market. Moving Average Convergence Divergence, stochastic, and the relative strength indicator are a few you could consider. There are oscillators as well that are quite good when it comes to identifying oversold or overbought market conditions.

Keep in mind the 5 essential tips discussed above when commodity trading and it shouldn’t really be a problem for you to get the hang of it soon.

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