Everyone has seen the movie "Trading Places" at least once in their life; after all, it is a must during the Christmas holidays. The trade on pork bellies at the beginning; the orange juice report, with which the two starring actors, Dan Aykroyd and Eddie Murphy, take revenge on the Duke cousins… priceless!
Trading with commodities is the most fascinating and intriguing way to trade, as it includes a characteristic uncommon to any other market: commodity seasonality. This natural cycle of price movements gives traders a unique edge.
Knowing, for example, that a raw material always behaves in the same way at a certain time of the year due to commodity seasonality is an added advantage that only commodities offer. These predictable patterns emerge from production cycles, weather patterns, and consumption habits that repeat annually.
Furthermore, since commodity prices tend to rise during inflation, investing in this asset can help protect a portfolio from the erosion of purchasing power.
Spread trading is the best way to leverage commodity seasonality and provides an excellent opportunity to diversify your portfolio, reducing the risks. Balancing, covering and protecting the portfolio have to be the trader's first goal, and understanding commodity seasonality aids greatly in this approach.
Spread Trading takes much less time; you are not forced to spend your days in front of a monitor watching the real-time market data. Working on End Of Day data takes little time in order to organise the next day. So it is also ideal for those who use spread trading as a secondary activity, while still benefiting from commodity seasonality patterns.
However, you must not only learn how to use statistical databases and software for your commodity seasonality analysis, but also exploit the main commodity reports, read the C.O.T. to see what the large traders are doing, study the term structure to see if there are any anomalies, evaluate the distribution of contango to determine if a movement is driven by speculation or real reasons such as a drought or epidemic, and many other essential aspects that complement your understanding of commodity seasonality.
Wheat, coffee, orange juice… not only you can use them to prepare a delicious breakfast, but by understanding their commodity seasonality, you can also trade them for a profit. Did I intrigue you? Click on the button below, and come learn about spread trading and how to capitalise on commodity seasonality!