2 Good Reasons to Trade Commodities

10/21/2011 4:30 pm EST

Focus: COMMODITIES

Carley Garner

Senior Strategist and Broker, DeCarley Trading, LLC

Commodity trading offers two distinct advantages over stock trading, says Carley Garner, who shares insights on which commodities to trade and how to analyze the markets and find opportunities.

We’re talking about commodities trading today with Carley Garner. Now Carley, why should a stock trader consider going into commodities?

Well, the greatest thing about commodities is the markets are open 24 hours. Stock traders like to live under the idea that the markets are only open from 9 am to 5 p.m. That’s the case in stocks, but that doesn’t mean the values of their investments aren’t changing. 

In commodities, the markets are actually open 24 hours a day, so if something’s going on in Asia or the European markets, you can act immediately.

That’s probably the biggest advantage of trading commodities, but another thing is that there’s a tax advantage. People trading commodities are taxed at what they call a 60/40 blend, so rather than them paying all short-term capital gains taxes, they actually get a little bit of a benefit to trading commodities versus stocks.

Now looking out over the longer term, what types of commodities do you recommend that traders look into?

You know, I’m going to keep it real simple with that answer. I think anything that’s liquid. 

So what I’m going to point out is to stay away from things that just have no trading interest. The CME actually dropped pork belly futures, and the first thing that new traders want to trade is pork bellies, but you know what, nobody else wanted to trade them, so the CME dropped it, and a similar product is lumber. People also want to trade rice.

Stay away from illiquid markets, and stick to liquidity. The things that I’ve found are interesting to new traders are the mini contracts. 

They now have mini grains, mini corn, mini soybeans, mini wheat; those are the types of products that you can get into, you don’t have to have a huge capital base, and you can get your feet wet and see, feel things out, get an idea for leverage, and see how things move. 

The CME also listed what are called eMicro currency futures that I think are great because it allows the average retail trader to scale in and scale out of positions without taking on a huge amount of risk.

What are some of the biggest mistakes you see new commodities traders making?

Without a doubt it’s overleveraging and overtrading. People get excited, there’s lots of flashing lights on the screen, and they can’t help themselves; its human nature. They overdo it, and it never ends well. 

So the one thing that I can say is that patience is a virtue. Always wait for the great opportunities. If you miss a trade, that’s OK. I’d rather be on the sidelines wishing I was in than in the market and wishing I was out. 

What are some of the indicators that you like to use?

I keep it really simple. Trend lines, trend channels, volatility measures, the RSIs, Stochastics, so no rocket science here. Really simple. 

What I do look at a lot that maybe others might not are seasonal patterns, and I also keep an eye on the business news channels. What are people talking about on blogs? What does everybody think, because that’s really your competition. A lot of times if everybody thinks one way, that’s exactly when you should maybe start looking the other way.

So perhaps take a bit of a contrarian point of view?

Exactly. That’s just how my brain works. I know there are people on the exact opposite. They’re trend traders and they want to catch a trend and ride it. I’m the opposite way. If I see something that’s getting completely battered down, that’s when I want to buy.

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