Trading Commodities such as crude oil and soybeans offers a great alternative to the often indecisive equity markets.
From time to time a unique and clear technical setup may show up in any one commodity market. And unlikely the tricky movement of the other markets during that day or week, which could easily fool you into the wrong trading side, that commodity chart will tell it straight!
Trading commodities is nothing new, but is often overlooked as most traders focus on one market only, in an effort to become specialists in that market, to an extent, I believe in staying focused and watching one market rather than a dozen, but as regards technical analysis, it applies equally well to a variety of markets.
Rare and reliable technical setups only show up in the equity markets once in a while, but if you pick few heavily traded commodities and add them to your trading portfolio, then the frequency of these reliable setups will increase many fold.
Trading Commodities – Long Term Vs Short Term
For Trading Commodities on a longer term cycle, for example 5 days to few weeks or months, requires you to be an expert in currency trading, or at least watch the corresponding trend in the US dollar during that time period – All commodities are priced in US dollars, and this causes a strong inverse correlation between the two!
Trading commodities on time frames shorter than the trading week is different, and you have to pay more attention to the actual short term technical set up of the commodity in question, rather than the US dollar.
The correlation between commodities and the equity markets changes from period to period, that is because the actual correlation between the equity markets and the US dollar changes, it is positive some months, and then negative during other months. The correlation between the US dollar and commodities is always negative! If one is set to go down, the other will go higher.
The Commodity Index
The commodity index is a measure of some 17 commodity markets, including energy, food and raw material commodities, if money starts pouring into one the majority of these 17 commodities, then the single one you are trading will, sooner or later rise! Sometimes a lagging effect takes place, and the index may rise while a single commodity has been lagging behind (Rising but at slower rate), even so, sooner or later that commodity will still catch up with the rest components of the index.
I once met a trader who made $2,000,000 by buying futures contracts on the lagging sugar component, eventually sugar rose and caught up with the rest of the index. This is an example of the flexibility trading commodities offers, you can’t do that with stocks, because commodities like sugar are raw materials in certain demand – sugar consumption was not going to go down or stop, whereas it is possible for people to stop buying Apple computers or Microsoft software, nonetheless the commodity related stocks are affected, and trade similar to the underlying commodity.
Never engage in trading commodities before looking at the commodity index:
Commodities are defined as being in a bull or bear market by the 200 day moving average, on the above chart the index is testing this average, while the US dollar is testing its own key level. Trading commodities is very clear once we move away from such pivotal points, in this case if the commodity index goes higher then the US dollar will fall.
Stock Market Investing Tips by..
Scott Smith – Investing In The Stock Market © 2008 – 2010
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