Overview
Trading commodities is not as straightforward as trading other assets. A commodity is a physical item, and when ownership trades hands, the item must itself be physically transferred.
This complexity makes it more advantageous for traders to trade commodity derivatives, rather than the commodity itself. That is, many traders will prefer to trade on the price of the commodity, without having to deal with the issues surrounding holding or transferring the actual commodity.
Trading Strategies
Commodities as an asset is simpler than other assets. There just isn't as much public information. For example, an equity has a price series as well as a set of financial statements that are associated with it. Commodities have price series, but they dont have anything akin to a financial statement.
- Momentum and Trend - basic price action trading, typically trend following strategies have been shown to have promise in the commodity space. (see ilmanen) Identifying trends is typically done using techniques of technical analysis.
- Macro Forecast - the other significant strategy associated with commodities are macro trading strategies. Commodities are particularly sensitive to the boom and bust cycle of an economy. As such, having a broad market forecast can inform ones trading decisions.
- Backwardation and Contango - deviations from the theoretical arbitrage can signal trends in the commodities market. One trading strategy measures the average convenience yield and trades against deviations.