Commodity trading offers two distinct advantages over stock trading, says Carley Garner of DeCarley Trading, who shares insights on which commodities to trade and how to analyze the markets and find opportunities.
If you're a stock trader, why would you 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 pm. 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, there are several types of commodities that I recommend traders look into. To keep it real simple—I recommend trading anything that’s liquid.
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.
Having said that commodities are great trading vehicles, I would also like to point out some of the biggest mistakes new commodities traders make. 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.
I like to keep my trading really simple. Some of my favorite indicators that I like to use include 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.
I've found that it pays to take a bit of a contrarian point of view. 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.
Learn more about Carley at DeCarleyTrading.com