How To Trade Commodities

2022-04-11 | Simpler Trading Team

Agriculture and commodities are arguably the most essential markets on Earth. It’s where the exchange of raw materials occurs on a mass scale. If there is a crash in the commodity market, then there will likely be severe repercussions in all the financial markets around the world. With that said, there are two types of commodities that traders trade: hard and soft commodities. Hard commodities are considered precious metals, oil, and natural gas. Soft commodities are considered a grain, wheat, coffee, sugar, and corn, which we will discuss. 

There’s no doubt that in today’s market of 2022, everyone, including traders, is feeling the pressure of the low supply chain. Simultaneously, what’s going on in the commodity market has an adverse effect on the stock market. But, is trading commodities profitable? And how do traders predict prices in the commodity market? These are all fair questions that need to be answered, and it’s not as straightforward as one might think, so let’s get into the details.

Hard and Soft Commodities

A Video Guide to Trading Futures

Video guide taught by Shawn Hackett from Hackett Financial Advisors

How to Get into Commodity Trading? 

There are several unique ways a trader can get into commodities, and it boils down to the trader’s preference. But the most practical way is that traders get into commodities by purchasing futures. Traders need to be mindful that they need to have a brokerage account that has approved them to trade futures.

Futures act a lot like options. For instance, a future is a contract that involves a buyer and a seller. The seller determines the date and price, and if the buyer agrees to the terms, they can buy the contract. However, unlike futures, if an option is not profitable, the buyer can let the option expire. Futures aren’t like that; in this case, the buyer is obligated to buy the future regardless of whether profit was made.  

Is Trading Commodities Right for You? 

Trading futures can be a profitable strategy. However, it can be a nerve-racking feeling to see how fast-moving and volatile futures and commodities can be. Here at Simpler Trading, we understand that feeling, and that’s why we have The Futures Membership. Sign up today and gain access to the live trading room, get trade alerts, and get the help you need when trading futures. Why trade alone when you can trade with us and be a part of our community. 

How to Research Commodities? 

In this section we will be going through how to research commodities as taught by Shawn Hackett in the video above. If you are wanting more information about commodity trading you can visit Hackett Financial Advisors. When trading Commodities, traders have to be mindful of a couple of things that impact agricultural markets. And those impacts are nature itself and also financial needs. Obviously, nature will significantly affect soft commodities (for example, drought affecting crop yields in the Midwest). When nature adversely changes its cycles, traders in commodities will have to be aware of possible volatility. But what do commodity traders need to look at?  

Solar cycles 

You don’t have to be an astronomer to understand the effects of the sun and its celestial surroundings. But it may help; luckily for traders, some people conduct the studies that can help traders. Commodity traders go to the Space Weather Prediction Center to find these studies and help them understand the changes in nature. One of the most important studies on solar cycles is sunspots, but what are they?  

Sunspots are solar disturbances that are within the magnetic field of the sun. Sunspots are essential to understand because the sun directly affects nature and how much radiation it’s throwing at Earth. But these solar disturbances move in cycles where some disturbances are worse than others. It’s just one of the reasons why Earth’s resources go up and down. In 2020 we experienced relatively low sunspot activity. However, the activity will likely increase but will likely start to drop in 2027.  

SOLAR CYCLE PROGRESSION

Courtesy of the space weather prediction center       

Sea Surface Cycle

Traders need to understand throughout the history of humanity, the temperature of the Earth has gone up and down. For example, look at the ice ages, one of the coldest documented eras. Or the Neoproterozoic era, which was one of the warmest eras documented on Earth. But enough of the history lesson; the point is that the temperature of the Earth and the ocean’s temperature go hand in hand, and it means in cycles.  

If the ocean’s temperature rises, then the Earth’s temperature will increase. And, vice-versa, if the ocean’s temperature is cooling, then the Earth will start to cool down. You can probably see the pattern here, temperatures rise and fall, and thus affect our crops. Below you can see the chart of the rise in the temperature. However, according to Shawn Hackett, the chart doesn’t show that the ocean will start to get cooler little by little starting sometime this year. 

Average Global Sea Level Surface Temperature

Courtesy of the EPA

With Solar cycles and the ocean temperature likely to drop soon, what will this mean? Essentially, it means cold airflow from the north and the south pole of the Earth will start to meet the warm weather closer to the equator. This type of volatility will have longer and colder winters. Colder and longer winters mean less farming, fewer resources, and fewer services that can be provided because farmers won’t be able to grow as much. When you have fewer crops to grow for an Earth population only increasing, that creates a shortage that traders need to be aware of. Unfortunately, you may have already noticed the shortage, and it’s only going to get worse.    

La Nina and El Nino 

La Nina and El Nino is a sea surface cycle in the central Pacific region of the Pacific ocean. When it’s cold, it’s referred to as El Nina, and when it’s warm, it’s referred to as El Nino. Scientists can predict these weather phenomena because they are both solar-driven. And right now, the central Pacific region is moving off of the La Nina cycle and moving into the El Nino cycle. So why does this matter? This type of cycling temperature change will hurt the commodity market.

It will specifically affect the cocoa commodity. Since 70% of the world’s cocoa production is produced in West Africa, and with the water in the pacific ocean rising, it will cause a cocoa drought in the West Africa region. Below are the best charts to measure La Nina and El Nino weather cycles. 

  • North Atlantic Sea Surface Temperature (Falling AMO): A cooling Atlantic ocean means that West Africa will usually have a hotter and drier climate.

 

  • Pacific Decadal Oscillation (PDO): A warming Pacific ocean means that there will be a drought, coupled with a cooling Atlantic will add to the effects. 

 

  • Tropical South Atlantic Index (TSA): What traders will want to see is cooling in the South of the Atlantic, where it lifts some of the heat and pressure from the northern part of Africa. 

 

  • Atlantic Meridional Model (AMM): This is located in the hurricane belt of the Atlantic; when this cools, this also supplements the TSA, 

 

  • Positive Indian Ocean Dipole (IOD): This is located in the Indian ocean, and traders will want to see a positive dipole which means that the temperature in East India is cold and the temperature of West India is warm.   

These key weather indicators can help traders understand the weather patterns that different world regions go through, especially drought. Droughts are one of the most damaging weather patterns that affect commodities in your portfolio. For example, with the cooling of the Tropical South Atlantic indicator, every time it displays a drop in temperature, it is always met with a severe drought. And right now, the Earth is not only going through changes where it will have an adverse effect on the commodity market.    

Best Indicator To Use for Commodities?

Indicators are always a great tool to help with trading, and using the analytical methods above can help you decide within your commodity trading. Below, we will go over some of the best indicators for futures trading. 

  • Relative Values Indicator – helps place value on an asset compared to other assets
  • Smart Money Algorithm Oscillator – helps determine to buy and sell signals
  • Moving Averages – helps determine patterns with technical charts 
  • Fibonacci Sequence – helps determine a pattern within financial markets and nature
  • Dynarange Indicator – entry and exit indicator, helps predict the trend of commodities

Are you Ready to Trade Commodities?

Trading futures can be a profitable way to trade commodities. However, there is a lot that goes into it. Commodity traders need to observe and factor in several key pieces of information, such as financial and natural sources. If traders are unwilling to do the research or are underprepared, futures might be difficult to profit from. 

Luckily this is where Simpler Trading comes in. If you are interested in futures but don’t know where to begin, sign up to be a Simpler Trading Futures Member. Our experienced and professional traders can mentor you through the learning curve of futures trading. So what are you waiting for? Join us today. 

 

FAQs on Trading Commodities

Q: Can you day trade commodities?

A: Yes. Day trading commodities can be an approach for beginner futures traders.

Q: What are the benefits of commodity day trading?

A: When trading commodities, you can focus just on one or two markets and hence get to know the markets very well.

Q: Best platforms for trading futures? 

A: Most trading platforms offer futures trading, the ones Simpler Trading recommends are tastyworks, Thinkorswim, and TradeStation. They provide an easy platform to understand, which can cater to your trading style.

Q: Is trading futures worth the effort?

A: There is a definite appeal to futures, and that’s because the trading hours are much longer; there isn’t a PDT rule that has to be followed. And unlike options trading, traders don’t have to worry about theta decay. However, futures trading requires research and a disciplined trading plan like every trading strategy.

Q: Does Simpler Trading offer more resources than the Futures membership? 

A:  Absolutely, we have expert traders who specialize in futures, such as Joe Rokop’s Strike Zone Mastery. Sign up, and you will be able to trade alongside an expert that can guide and mentor you.