What is a Commodity?
A commodity, is economic terms, is something that holds intrinsic value. Stocks do not hold intrinsic value. If the market crashed today, the stock that you hold in a company would be worthless. Whereas, if you owned a bushel of Corn and the market crashed, your Corn would still hold value since it can be exchanged through a use value.
There are hundreds of commodities. From Gold to Platinum, Crude Oil to Natural Gas, and Wheat to Barley, naturally you can see how these all have intrinsic values. Oddly enough bonds, currencies, and interest rates are considered commodities. This is because currencies of countries depend heavily on their export of raw goods. Thus, an indirect relationship to the intrinsic valued definition.
Risk vs. Reward.
You have to ask yourself, how can I benefit myself from trading commodities. There are a lot of positive benefits, and there are some negative benefits. Check out our article on Commodities vs. Stocks. This is step one to trading commodities. It takes more effort to trade, but less effort to find trends.
Always sell before trading hours end.
Why are the majority of day traders, commodity traders? It is not that commodities are more volatile, rather they are more leveraged. Compared to a stock that closes at $25.50 and then opens the next day at $25.00 which would equate to a relatively meager loss, commodities can have you losing thousands from such a spread.
On this chart, the shaded ovals are time periods that have a gap between a closing price and an opening price. If you remained in a trade at the close of one of these days before the gap, you probably would not of had a nice following day.
Volume is key, like always.
Commodities are sold by the contract: one contract of Pork bellies equals 40,000 pounds of frozen and trimmed pork bellies. That is a lot of money (speaking about leverage.) Similar to stocks, a commodity will increase in price, as more demand is noticed. More demand is a higher volume. If there is a downtrend in the Volume, or the Volume Oscillator, beware. This may mean your contract will decrease in price in the future.
Contract Expirations
Volume is proportional to the contract expiration dates. When you first begin trading commodities, you will notice that each month is represented by a unique letter:
January - F
February - G
March - H
April - J
May - K
June - M
July - N
August - Q
September - U
October - V
November - X
December - Z
All Commodities follow the same lettering, however, each commodity has a different set of contract expiration months that will be the same each year.
On this chart, you will notice that the Volume Oscillator (PVO) and Volume follows a trend. On average, every 2 months the Oscillator spikes and the Volume spikes. Although this is attributed to the Beginning of a new Contract (since the end of each contract ends with sell offs and therefore decreasing volume), this trend can be very useful when to time price spikes. For example, look at when the indicator spikes, and travel downward to see if it corresponds with a price spike. Ironically, sometimes they correspond with a price trough.
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