Specializing in Trading One Commodity
Some commodity traders make a good living by focusing on trading a single commodity. There are about 30 commodities that are fairly actively traded, but it is difficult to keep up with all the commodities and trade them. Some traders like the expanded range of opportunities if they follow many commodities, but a good case can be made for specializing in one commodity.
I trade a wide variety of commodities because there are always plenty of trading opportunities. I also do this work for a living, and I need to stay updated on all commodities. Therefore, I have the time to follow many commodities and thus trade them. For most people, following one commodity can drastically cut down on their research time and they can also become an expert on a commodity much easier.
How to Focus on One Commodity
The first thing to do is research a wide variety of commodities and see which one makes the most sense for you to trade on a regular basis.
Most people will have some type of affinity for a particular commodity. They either follow a commodity directly or indirectly for their work, or they had better success trading a particular commodity. Some commodities are more volatile than others, so finding the right commodity with the right volatility is also important.
Liquidity is also another consideration. For those who like to day trade futures, a liquid market like gold or crude oil might be good considerations. Markets like orange juice or lumber can be very illiquid and not a good market to day trade. If you like to trade long-term, liquidity is not a major concern.
One of the good aspects of focusing on one commodity is research can be done rather quickly each day. There are many analysts that provide research and trading recommendations on commodities. Most of them focus on one commodity or a commodity sector. It is a good idea to take a look at all the analysts that cover the commodity you want to trade and eventually only follow a couple that you feel are the best.
Once you find the news sources and analysts for your commodity, you can keep up on the latest developments for the market in 15-30 minutes a day. For technical traders, you only have to look at one chart each day.
Some traders like to follow many commodities and only trade the markets that are making big moves. This is a good approach for traders who have a trend-following or momentum trading strategy. There are times when a market is so strong or so weak that some of the easiest trades are just jumping on board a fast-moving market.
For traders who seek action or need action to have a profitable year, following one commodity might not make sense. It might sound simple always to trade the market that is in the strongest trend or is making a big move from a big change in market fundamentals. In reality, this can be very dangerous if you are not a skilled trader or you do not know the markets well.
The average trader and new traders should benefit from focusing solely on trading one commodity. It will drastically reduce the amount of time it takes to learn how to trade and probably make a better trader out of you. Over a period of time, you will see the same patterns repeat over and over.
It is a good feeling when you begin to understand the little nuances of a particular commodity. There will be times when a market rallies for a couple of days. The news states that the market is rallying for a reason you know rarely causes a prolonged move in the market. Uninformed traders might chase the market higher thinking it is breaking out, while you take a short position. It is a type of example of how many floor traders have made a good living for decades in the markets.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.