Let’s examine some of the most popular commodity trading strategies – including how trend, range, and breakout strategies work with commodities.
Trends work in commodities just like they do in other markets, arising when metal is constantly reaching higher highs or falling to lower lows.
Traders who want to take advantage of such market movements will use a trend-following commodity strategy. The goal is to profit from the body of a trend and exit the market before or shortly after the movement reverses.
Popular technical analysis tools for following trends include moving averages, MACD and Bollinger bands. All these indicators are designed to monitor a market’s momentum and identify changes that might provide entry and exit levels.
So, for example, you might:
- Buy gold on a pullback, hold your position while the market rises, and sell it when momentum starts to slow
- Sell gold on a breakout, hold your position while the market falls, and sell it when momentum starts to slow
It's important to remember that a trend won't last indefinitely – especially as commodity markets are so volatile – so you'll need a strict methodology for when you'll exit the trade and means of protecting yourself from risk, such as stopping losses.
Range trading strategies seek to take advantage of a commodity that is currently in a period of consolidation. A market which remains within support and resistance lines rather than reaching new highs or lows.
The key to a successful range trading strategy is to be able to identify when a commodity is in overbought or oversold territory.
Popular range trading indicators include the Commodity Channel Index (CCI), the relative strength index, stochastics, and the momentum indicator. These indicators can be used to confirm overbought and oversold signals, which are likely to provide an idea of support and resistance areas.
It’s important to remember that a market can remain in overbought and oversold territories for long periods, so you should use other technical indicators and fundamental analysis to confirm any moves.
Breakout trading is a common strategy to take advantage of shorter-term commodity movements. It involves entering a position just before the market moves substantially higher or lower. Unlike a trend-following strategy, you’d only be looking to trade the initial market movement, rather than the body of a trend.
The danger of breakout trading commodities is false breakouts («fakeouts»). Commodities are notoriously volatile, which means support and resistance levels can sometimes be breached without a sustained move following it. False breakouts occur when the buying or selling pressure becomes exhausted quickly, and so the market reverses just as quickly as it broke out.
Popular technical analysis tools for following trends include moving averages, MACD and Bollinger bands