Account

New to ADSS? Open an
account now to get started.

OR

Already have an account?

Add funds to your ADSS account

Account

New to ADSS? Open an
account now to get started.

Add funds to your ADSS account

Trends & Analysis
News

Gold closes week higher on rate cut speculations

News

Week Ahead Preview: 20th of May

News

Walmart’s stock hits record high on Q1 results

News

Crude oil rises on US supplies, inflation data

News

Another nice quarter for NVIDIA?

News

Alibaba delivers earnings miss, shares slide

Trends & Analysis
News

Gold closes week higher on rate cut speculations

News

Week Ahead Preview: 20th of May

News

Walmart’s stock hits record high on Q1 results

News

Crude oil rises on US supplies, inflation data

News

Another nice quarter for NVIDIA?

News

Alibaba delivers earnings miss, shares slide

Learn

Top 5 technical indicators for commodity trading

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

Introduction

The commodities market joins together hedgers and speculators, with both types of traders looking to share in the price action of industrial and agricultural commodities, motivated by very different reasons. Commodities exhibit peculiar price characteristics and do not trade in the same way as larger and better-known asset classes like forex or equities, but CFD traders who take the time to understand these markets will be rewarded with interesting trading opportunities. Commodities include agricultural products like wheat, industrial commodities including the metals market and crude oil, and energy. Price charting and technical analysis make up a large part of commodities trading, but traders need to also be aware of the fundamental factors influencing price performance.

 

What are commodities?

Commodities are basic and interchangeable goods: if you have one barrel of crude oil, it can be replaced with any another. In practice there are slight differences between different batches of commodities, so exchanges and suppliers standardise their products and use different contracts according to the quality and nature of their product, resulting in multiple contracts such as West Texas Intermediate and Brent Crude. But the principle of interchangeability is key to commodities contracts and allows the market to function.

Commodities are widely used in industry, where they form an essential part of manufacturing processes or are used as food for humans or animals. For many commodities, the majority of price action is driven by buyers and sellers who are otherwise involved in the industry, these are known as hedgers. Hedgers normally take out positions in the spot or derivatives market to protect themselves from price changes in the underlying asset, for example if a farmer sells wheat, he may use futures contracts to lock in a favourable price. Hedgers are complemented by speculators, who enter the market without a direct interest in the underlying industry, looking to make a profit on price movements.

 

Commodity CFDs

At ADSS, traders can deal in the commodity markets using CFDs, with varied underlying assets including oil, energy and gold. CFD traders do not take ownership of the underlying asset, instead opening a contract with their broker to exchange a cash sum equal to price movements in the underlying asset. This puts commodity CFD traders within a special subcategory of speculator, ones who do not participate directly in commodity markets but instead indirectly share in their price action. To understand the price drivers of commodity contracts, which are not influenced by volumes in the CFD market, we need to look at hedgers and speculators trading with the possibility of cash or physical delivery.

 

Hedgers

Hedgers are most active in the forwards and futures markets. Contracts like CME crude oil futures allow producers or manufacturers vulnerable to price swings to lock-in favourable prices, allowing them to plan ahead and budget despite market uncertainty. Hedgers may want to lock in both low and high prices, since they may be end users of the commodity as well as producers such as miners and farmers. Hedgers often take physical delivery of their contracts, though they will also cash settle futures if they wish to maintain the position. Hedging activity is constant and reliable, providing a baseline of liquidity to commodity trading markets.

 

Speculators

Speculators are interested in finding novel price risks and market exposures, and they use derivatives contracts which are cash delivered or rolled over before expiry to do so. Commodity CFD traders are also speculators, but because they do not trade directly in markets, they do not influence the overall price dynamics. For speculators using trading charts commodities can be tracked according to technical market conditions, using oscillators and related indicators such as Bollinger Bands. Most speculators hold shorter-term positions, but it is also possible to hold long-term commodity positions. This is most common in precious metals, which are a special subtype of commodities that trade differently to the majority of industrial metals or energy.

Technical analysis

Technical analysis of commodities is the most important means for traders to get a view over short-term price action. Concepts like support and resistance and momentum are key to understanding price shifts in a market, and traders need to know the main techniques for analysing them. Support and resistance can be seen clearly on line or candlestick charts, while momentum requires volume information. Oscillators like the RSI or a Bollinger Bands strategy allow traders to see weakening trends and impending reversals, important for any mean reversion strategy.

 

1: Support and resistance

The basic concept underpinning technical analysis is support and resistance. These are price levels where market expectations cause pressure against the prevailing trend, whether positive or negative. Support levels are prices at which downtrends tend to reverse as new buyers come into the market, and resistance levels are price points where traders begin to close long positions or open short ones. Support and resistance levels are often a fixed price but can also follow a prevailing trendline.  Price charting allows traders to easily visualise trendlines, and trade accordingly. When a support or resistance level is decisively broken it often signals the start of a new trend: the more times that a support or resistance has been tested, the stronger it is considered to be, and therefore the more intense the reversal.

 

2: Candlestick charts

Candlestick charts were first designed for use with commodities, in the trading of rice futures. These charts show the high, low, open and close prices and allow traders to identify candlestick patterns that can give a clue to future market conditions.  Trading candlestick patterns is a large subject in its own right, you can learn more about it here, but the most important point to know is that patterns can help predict the direction of a trend.

Candlestick patterns are characterised as continuation or reversal, and as bullish and bearish. Continuation patterns indicate that a trend will strengthen and continue, while reversal patterns are a sign the trend may be losing momentum and is about to reverse. Bullish and bearish simply refers to the direction of the trend, and most patterns have a normal and inverted form for one or the other. Candlestick traders will often use another indicator such as the RSI to confirm the sign shown on the chart, as well as combining technical and fundamental analysis to reach a decision.

 

3: Relative Strength Index (RSI)

Momentum oscillators are another popular set of indicators used by commodities traders. The archetypal momentum oscillator is the relative strength index, used to identify overbought or oversold conditions. The RSI gives a figure between 0 and 100, with 20 or 30 and 70 or 80 usually used as the cutoff for oversold (low figures) and overbought (high) conditions. Mean reversion strategies involve looking for failing trends and opening a position in the opposite direction. The RSI is ideal for this, but it must be combined with other indicators or chart patterns to produce a reliable signal.

 

4: Bollinger Bands

Bollinger Bands consist of an envelope of volatility bands placed above and below a moving average, providing visual information about price volatility and highlighting potential reversal points based on the deviation of prices from the average. Volatile markets will show wider bands, and a common Bollinger Band strategy is to open long positions in an asset that touches the top envelope. The opposite, where the price of the asset touches the lower envelope, is considered a bearish signal.

 

5: Moving averages

Moving averages are smoothed price lines superimposed onto the chart. Moving averages reduce the effect of noise, minor fluctuations in the price that do not say anything meaningful about the overall trend. Technical traders use moving averages as part of their price charting, noting when the market price crosses over the average. Multiple averages can also be used in Moving Average Convergence Divergence (MACD), where crossovers between a short-term and long-term moving average are used to identify trends.

 

Commodity supercycles

The price action of commodities is significantly different from other assets. Commodities that are correlated with the general market are mostly risk-on assets, trading up during periods of economic growth and falling during downturns. This is logical enough, since commodities are consumed by the same industrial businesses that drive overall growth. A few commodities follow their own price cycles completely divorced from the general market; some agricultural commodities such as wheat are good examples. This is because the demand for food does not strictly follow business cycles or overall market sentiment, since people need to eat in all circumstances.

One important and controversial aspect of commodity prices is the existence of supercycles – large multi-year cycles that see all commodity prices speak together. The last clear supercycle took place in the late 1990s and 2000s, and saw across the board increases in the price of many industrial commodities, especially in the metals market. During a supercycle, pronounced price increases are seen across industrial commodities. This differs from the short-term price shocks seen in the commodity market during supply problems in that it is long-lasting and generalised across commodities. Not all analysts agree that commodity supercycles exist, but it is a unique characteristic of this market and important for commodity CFD traders to be aware of.

 

Summary

Commodity trading via ADSS commodity ETFs is an exciting market, where traders can access unique risk profiles from the metals market and other commodities. Many of the same principles used in stock and forex trading can be reapplied here, but there are also unique characteristics both to commodities in general and each individual traded market. The five technical strategies laid out above are useful, but must be backed up with a thorough understanding of the industrial market behind the commodity, and proper risk management practice. This is because, just like all assets you trade, losses can exceed your deposits.

FAQs

What chart types should I use to view commodities prices?

Commodities can be traded using all the most common chart views such as bar charts, candlestick charts or the classic line graph. Some commodities have a favoured type; the grain bar chart is popular and brent crude price charts are normally viewed as simple line graphs. But there is no compelling reason to favour one over the other, so use whichever view you prefer.

What are the most important crude oil contracts?

ADSS CFD traders can trade our US Oil CFD contract, that tracks the price of [CONFIRM] the West Texas Intermediate spot market. Investors can use both the WTI and Brent crude price chart to formulate a strategy, then accessing the market indirectly using CFDs. Remember, the value of CFDs can fluctuate, and investors do not own the underlying asset.

Does fundamental analysis work with commodities?

Fundamental analysis is a critical part of successful commodities trading, and you should not trade commodities purely on price action. Understanding the drivers of supply and demand in the underlying market is essential for consistently profitable trading. Remember, both overall economic conditions and events specific to the traded commodity (eg. mine closures or transport problems) will impact market prices.


Site by Pink Green
© ADSS 2024


Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.

The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.

ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.