Commodity Trading Strategies

Commodity Trading Strategies

For many experienced traders, the best strategy in trading commodities is to diversify their commodities portfolio. Gone are the days when they can only purchase commodity futures contracts. Thanks to the internet, there are now a number of investment tools used in the commodities market alone. Commodities are mostly volatile and they don’t always move in the same direction. At present, commodities are grouped into 5 categories: livestock, softs, grains, energies and metals. Some of these commodities are strong when the economy is strong, while others thrive when economies are bad. Hence, the best way to minimize risk is to purchase as many commodities contracts as possible. Needless to say, however, this can be very costly. Thankfully, there are now new ways traders can spread the risk on their investment portfolio.

One way to diversify your commodities portfolio is through the commodity ETF. Some of the best commodity ETFs includes the DJP (the Dow Jones AIG Commodity Index Total Return) and the DBC (Powershares DB Commodity Index Tracking Fund). These ETFs allow traders to invest in a number of commodities and take advantage of individual price movements to generate profit.

For traders who have less than $50,000 in their accounts, diversifying their portfolio can be difficult. Purchasing commodities futures can cause havoc to any trader’s account because they offer unlimited losses. On the other hand, commodities options are time sensitive and can sometimes expire before the market moves in the desirable direction.

Hence, for traders who are new to the commodity market, most brokers would suggest managed commodity futures fund (MFF). Through this strategy, a broker will pool money from different investors and use that to spread their risk across different commodities. Most of these funds use technical tools such as trend following programs to help traders open positions in preparation for the big move. Since these funds invest in a number of markets, there is a strong possibility that they will capitalize on a market which can provide huge profits.

According to expert traders, it is best to invest in a commodity ETF or an MFF if you are looking to participate in the commodities market in the long term. This way, you won’t need to purchase one or two (sometimes more) commodities to diversify your portfolio. This way, you can minimize risk on your portfolio at lesser cost. Investment advisors typically recommend their clients to invest no more than 10% of their capital to individual commodities contracts.
 

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