In this week’s issue of the Market Slice, we focus on Commodities Trading – A Discussion of the Bull Cycle & Market Momentum.
Commodities Bull Cycle Continues
Where is all the “funny money” going?
Ever since the massive increase of quantitative easing at the start of the pandemic, capital inflows have been diving markets higher.
Everyone sees it in the stock market, where new records are set almost every week. It is generally understood that the biggest factor driving equities prices higher is the influx of stimulus-driven capital into the market.
This phenomenon is called ”asset price inflation,” and it’s nothing new. Check out this pre-pandemic article from the Mises Institute to see how Fed-fueled asset inflation was in play even before COVID.
But now, with trillions more injected into the economy, the problem is worse. And of course, it’s bleeding over into consumer prices, too… while official statistics still have consumer price inflation at around 4-5%, other estimates are as high as 10%.
While the question of what drives consumer price inflation is complex, there is opportunity for traders to profit from rising prices, whether in the stock market or in the real economy. And that’s where commodity trading fits into a balanced trading plan.
Hot and Cold Markets
Some futures markets are not trending upward. The metals and most currencies are in negative territory in terms of “weighted Alpha,” which measures profit potential. While there are still trading opportunities in these markets, obviously, the prospects for a breakout to the upside are less.
At the same time, many agricultural markets – along with most equity indexes – are positive.
What this tells us is that these markets should be watched for major upside moves.
Stimulus money that has not found its way into the stock market is seeking supply. This increased demand drives prices up, whether in retail or wholesale channels.
In other words, commodity prices are being forced upwards by expanded money supply, just as we’ve seen with stocks. But where valuations in the stock market are at extreme highs, many commodities are still at the lower end of historic inflation-adjusted price ranges. Or at least not at the top!
A correction in stock prices, especially in the event of an economic downturn, seems possible if not probable. Commodity prices, on the other hand, are likely to continue rising, even in the event of a stock market correction. For this reason, it makes sense to consider including a commodities strategy in your trading portfolio.
FFR Trading has a Strategy Team prepared to help you figure out how commodities trading might fit with what you are already doing. Call us to speak with our knowledgeable, seasoned professionals today!
Finding Momentum Plays in the Commodity Markets
Commodities are often viewed as a riskier, more speculative investment than stocks. This is primarily due to the leverage inherent in any Futures contract… when you control a large amount of any product with a relatively small amount of capital, the risk increases.
Smart traders, however, can minimize the downside with proven risk management strategies, while taking advantage of the serious gains these markets can provide.
It has been said a million times that “the trend is your friend,” and like most maxims, this one is true… if you understand how to take advantage of long-term trends in the commodities markets.
Let’s take a closer look at the October ’21 contract for Crude Oil.
This is the one-year chart. The bottom line is a 55-day moving average, and the top line is the 13 day moving average. As you can see, in mid-November of last year, these lines crossed, and between that time and August of this year, the price moved from about $42 to nearly $70.
That’s quite a trend! Do you think you could have made money in this move by getting on the long side at the right time?
Now take a look at the 3-month chart:
Here we see the reversal in August mentioned above. It was followed by a sharp correction, but the downturn didn’t last. Quick profit-taking would have been required to get out of a trade initiated by this signal with a gain.
That’s what a good system does! It locks in profits when a trade goes your way and minimizes losses when it doesn’t.
One more chart. The daily:
The same simple moving average technique shows potential entries and exits on September 9, and an entry on the 10th.
Please note: This is not a trading system recommendation! These charts are only used to demonstrate the principle of trend trading! You need a more sophisticated strategy to actually trade this kind of move successfully!
The point is that there are powerful profit opportunities in trading with a strong trend, and commodity markets often demonstrate consistent, long-term price moves.
Of course, sometimes they also go sideways for extended periods! That’s why trend traders need to cover several markets, to catch the right move at the right time.
At FFR Trading, we work with proven, professional traders who have spent decades refining their systematic approaches. To learn more about how commodity trend following can build your trading profits, call 1-800-883-0524, and speak with a member of our Strategy Team! Or click the button below to schedule a no-cost consultation.
Fear of the Unknown: An Opportunity Crusher
How many times have you wanted to do something, whether in your trading life or elsewhere, but held back because you didn’t know what would happen?
If you’re like most people, the answer is “often.” And when you look back on those moments, chances are you will see that they contained opportunities that you were sorry to miss.
The simple truth is that it takes courage to step through the door into the unknown, in our personal life and in our trading. Yet that’s where the greatest rewards can be found!
When it comes to trading, the root of this fear is the possibility of loss. We are afraid of losing money, so we reject anything we don’t understand. It’s perfectly natural.
Yet all the experts say the same thing: you must see losses as learning experiences if you want to grow as a trader! And one of the biggest learning experiences is when we expand our trading universe to include new perspectives and new trading ideas!
Of course, nobody wants to suffer losses. But the ironic thing is that when we trade from a limited, fear-based outlook, we usually end up losing more!
Successful trading requires courage. The problem is, many retail traders base their decisions on incomplete information, and wind up acting rashly. “Bold” and “impulsive” are not traits that correlate well with winning in the markets!
Instead, you want to make smart decisions to evaluate and test new strategies. Always be looking for the opportunity in the unknown, but don’t be the fool who rushes in where wise men dare not tread!
One of the best ways to go into uncharted territory is with a seasoned guide. Our professional Strategy Team members have what it takes to understand your trading plan and what you want to accomplish. They will only make a no-pressure recommendation after getting the complete picture of your goals. Call (800) 883-0524 to get started right away!