April 5, 2019

Types of Commodity Trading Strategies

Types of Commodity Futures Trading Strategies   

If you’re venturing into Commodity Futures Trading, it’s a good idea to have a plan to determine how you’ll enter and exit the markets, and what type of trades you’ll take.  While it’s a zero-sum game, you’ll need a strategy to compete with the pros and the discipline to implement the strategy.  Every strategy has its pros and cons, so it’s a good idea to determine what type of strategy makes sense to you.  Here are few different types of futures trading strategies to consider.

The Trend Following Futures Trading Strategies

Perhaps the most popular strategy in commodity trading is the Trend Following Strategy.  Trend Following strategies are trying to buy markets that are moving higher with the expectation that they will continue higher.  Conversely, they will sell short in markets that are moving lower with the expectation that they will continue moving lower.  Trend Following Strategies will not pick a market top or a market bottom, they are simply trying to take the profit out of the middle of the trend and will stay with trades until the trend ends, which can last months or even years.  

This strategy tends to work well in markets that exhibit supply/demand imbalances, economic uncertainty, or crisis periods that are driving market trends to extremes. Implementing a trend following strategy over a diverse portfolio of markets is one of the best ways to participate in market trends without being an expert in every market.  Trend Following Strategies typically have a predetermined amount of risk on every trade and an unlimited profit potential.  

Mean Reversion Futures Trading Strategies

The Mean Reversion strategy has gained popularity in the 2000’s as an alternative, shorter term, trend following strategy, The Mean Reversion Strategy is trying to enter a market trend on a retracement, then exit the position when the market reverts to a higher level in the trend.  This futures trading strategy tends to work better in volatile trending markets and will buy dips and sell rallies in a strong up trend. 

Mean Reversion trades typically last a few days to a couple weeks and usually have a predetermined amount of risk with a predetermined profit potential on the trades.

Counter Trend Futures Trading Strategies

The Counter Trend Strategy, also referred to as a range trading strategy is designed to trade a market that is in a sideways pattern.  Counter Trend Strategies will attempt to buy the bottom of the trading range and sell the top of the trading range as long as the market stays rangebound.  This strategy tends to work best in sideways non trending markets. 

Price Pattern Based Futures Trading Strategies

Price Pattern Based Strategies are based on unique price bar relationships within a market.  Unlike other strategies that rely on technical indicators, Price Pattern Based Strategies simply look at price bar relationships for an edge.  These strategies don’t necessarily trade better in counter trend, or trend following environments and simply rely on repeating patterns to find an edge in the market.

For more information on futures trading strategies please visit our trading system page.

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