Commodity trading strategies

Welcome to the "Mastering Commodities" course. If you are new to commodities, you may want to start by going through the lessons in our Introduction to Financial Markets course first.

If you want to learn more about commodities – including how to trade them, detailed market analyses, and additional insights – you are in the right place.

To begin, let’s explore some of the most popular commodity trading strategies, including how trend trading, range trading, and breakout trading work in commodity markets.

1. Trend trading

2. Range trading

3. Breakout trading

Trend trading

Trends in commodities work the same way as in other markets, forming when a commodity reaches higher highs or falls to lower lows.

Traders looking to capitalize on these market movements use a trend-following strategy. The goal is to profit from the continuation of a trend and exit the market before or shortly after the trend reverses.

Popular technical analysis tools for trend following include moving averages, MACD, and Bollinger Bands. These indicators are designed to track market momentum and identify shifts that may present entry and exit opportunities.

For example, you might:

• Buy gold after a pullback, hold the position while the market rises, and sell when the growth momentum starts to slow.

• Sell gold after a breakout, hold the position while the market declines, and exit when the rate of decline begins to slow.

It is important to remember that a trend will not last forever – especially since commodity markets are highly volatile. Therefore, you will need a strict methodology to determine when to exit a trade and risk management tools such as stop-loss orders to protect yourself.

Range Trading

Range trading strategies aim to take advantage of a commodity that is in a consolidation phase. This occurs when the market remains within support and resistance levels rather than reaching new highs or lows.

Traders focus on identifying support and resistance levels, where the price of a commodity consistently reacts. The goal is to buy at support levels and sell at resistance levels, expecting the market to continue moving within this range.

The key to a successful range trading strategy is the ability to determine when a commodity is in overbought or oversold territory.

Popular range trading indicators include the Commodity Channel Index (CCI), Relative Strength Index (RSI), Stochastic Oscillator, and Momentum Indicator. These tools help confirm overbought and oversold signals, which are likely to indicate support and resistance zones.

It is important to note that a market can remain overbought or oversold for an extended period. Therefore, traders should also use other technical indicators and fundamental analysis to confirm potential price movements.

Breakout trading

Breakout trading is a popular strategy for taking advantage of short-term commodity price movements. This approach involves entering a position just before the market makes a significant move higher or lower.

Unlike trend-following strategies, breakout trading focuses on the initial market movement that occurs when key support or resistance levels are broken, rather than trading within the overall trend.

The goal is to capture profits from a rapid price shift when the market “breaks out” of a set range and starts moving decisively in one direction. Traders identify potential breakout areas and enter positions before the breakout happens to maximize gains from the initial surge in price movement.

One of the main risks of breakout trading in commodities is false breakouts (also known as "fakeouts"). Commodities are known for their high volatility, meaning that support and resistance levels may sometimes be breached without a sustained movement in that direction.

False breakouts occur when buying or selling pressure quickly dissipates, causing the market to reverse just as quickly as the breakout happened. This can lead to losses when a trader enters a position based on a breakout, only to find that the market swiftly returns to its previous range.

To mitigate the risk of false breakouts, traders should combine breakout trading with additional technical tools and confirmations to ensure a stronger likelihood of a sustained price movement.