When stocks decline, futures traders shine. Here's how to make your commodities investments grow in 2023.
Updated Jan 26, 2023
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Oil & Commodities
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Do you think you can predict the future? Wanna get rich doing it? Well, if you've been paying attention to the best-performing assets this year, then you know that now's the time to invest in the commodities. Things like corn and oil have had a hot streak on the market while the world turns batshit crazy, so don't feel bad for making a few extra bucks off it.
If you're wondering how to invest in commodities, one of the best ways to do that is by using successful trading strategies on the futures market. So what does a powerful futures trading strategy look like? Let's stop chatting and start plotting futures trading strategies that'll bring home the bacon.
The right strategy for trading futures starts with picking a few futures markets and sticking to them. You want to build an understanding of the underlying commodity you're investing in before executing your plan. The first step is creating a projection of how you think your chosen futures market will perform. You want to look at trending markets, analyze their market volatility, and hypothesize whether they'll go up or down within your investment timeline. After that, you can decide whether you want to take a short position or a long position.
After you've projected the market for the underlying asset, consider what'll happen if it doesn't meet your expectations. There are risks to commodities investing, so before you trade futures, have a contingency plan to limit the losses you may sustain if the market doesn't perform as planned. This will help you decide when you should cut your losses and exit your futures contract position. If you're new to futures, start small and expand once your trading strategy starts succeeding.
Finally, stay open to both the short position and the long position. Some investors instinctively capitalize on markets when prices are up, but betting against the futures market can be just as profitable. What goes up must come down, so don't be afraid to buy put options even if commodity prices are high. If you're unsure whether to go long or short on a certain futures contract, then try a spread trading strategy where you invest in both long and short futures positions to limit losses by hedging one against the other.
Agricultural products are a staple in soft commodities futures markets, and one category that has appreciated significantly this year is food crops. Particularly, the prices of grains like corn, wheat, and soybeans have surged in 2022, making them some of the best commodities to invest in today. The trend of high grain prices may continue due to factors like supply chain constraints, international conflicts, and decreased soil fertility.
One of the hottest agricultural commodities this year is soybeans and futures contracts for them have reached new heights multiple times in 2022. Soybeans are a crucial ingredient for processed food since the crop is used to produce over half of the world's vegetable oil. More importantly, most of all soybeans produced are used as feed for livestock, which is a major demand driver for the crop. Soybeans keep for about 6 months if stored properly, so keep this production cycle in mind as you strategize a soybean futures investment.
While China and other Asian countries are the largest soybean consumers, soya crops are mostly located in the warm water-rich regions of North and South America. This means that issues in the global supply chain may have implications on the price of soybeans. Additionally, demand for livestock products and manufactured foods that depend on soybeans could cause the legume to rise in price in the future. Futures brokers might surmise a bullish short-term outlook on soybeans.
Another grain crop that has performed exceptionally well this year is wheat. Wheat prices surged several times this year due to numerous factors, the most notable being the Russian military operation in Ukraine, which is a major grain producer. New developments in the conflict and the introduction of international sanctions have put pressure on the wheat market, which, in addition to rising fertilizer costs, could drive wheat prices up even further.
Conditions in the wheat market have cast a shadow of uncertainty as far as futures traders are concerned. It's difficult to predict how wheat will perform in the commodities market because of several geopolitical and logistical factors. Rising grain prices could cause farmland value appreciation for the benefit of farm owners and investors. You can reap those benefits with FarmTogether, a trading platform that lets you gain exposure to productive farmland. While rising production costs could paint a clearer picture of what wheat prices will be, there's no definitive indicator of which direction wheat futures will go.
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Farmland
One soft commodity that has seen a price downtrend is Lumber. Lumber prices soared dramatically in 2020 as the pandemic led to production cuts at sawmills while demand for lumber for building and renovating houses went up. Now there's a price correction in the lumber market because the growing housing shortage in North America is generating demand for homebuilding.
Lumber prices have seen unprecedented volatility over the past couple of years. High lumber prices began during the pandemic but stayed at higher levels than usual as a result of supply failing to meet demand. Lumber prices will eventually level off as economic stability is restored, but this isn't likely to happen soon. We can expect relatively high Lumber prices until the number of newly built houses can satisfy the demand for homes and residential real estate.
Fossil fuels are historically the most lucrative commodities to invest in, but recent developments have caused the market to shift in favor of lightweight oils that are cheaper to transport. Lightweight oils are unrefined fossil fuels that are used to make gasoline and other consumer and industrial energy products. Crude oil futures are some of the best-performing commodity investments because of their favorable physical attributes and high energy demand.
The best type of crude oil to invest in is brent crude because futures contracts for this commodity trade at a higher price than other crude oil varieties. While crude oil prices are highly correlated, the major reason why Brent oil trades at higher prices is its lighter weight. Brent crude oil is sourced from oil fields in the North Sea, and this convenient point of origin makes it easier to export Brent oil across the eastern hemisphere.
Fundamental indicators point to crude oil prices going up, and this includes both Brent crude and WTI crude oil. The difference between these two types of crude oil is their weight and origin; WTI crude oil is extracted from American oil fields and is slightly heavier than Brent crude oil. Despite their differences, WTI crude and Brent crude futures prices have stayed in lockstep with the former trailing below the latter. So futures traders betting on either one will likely see the same outcome.
Both Brent crude and WTI crude oils will continue trending upward as long as demand for gasoline and other crude oil products remains consistent. While some companies are distancing themselves from crude oil to adhere to ESG requirements and demand for electric vehicles is rising, these factors are unlikely to affect your crude oil futures trading strategy anytime soon.
Another lightweight gas that should be on your radar as a futures investor is natural gas. Natural gas trades at much lower prices than crude oil, but this doesn't mean natural gas futures contract investments can't be lucrative if done right. Natural gas prices are somewhat correlated with other energy commodities because it's a cheaper alternative that rises in demand as fuel prices go up across the board.
Natural gas was the most profitable fossil fuel asset for futures trading in 2022 as prices for this commodity almost doubled since the start of the year. This price rise is mostly due to global macroeconomic factors that have made it challenging to meet demand. If price volatility has made natural gas futures too risky of an investment for you, maybe consider the EnergyFunders trading platform for making a long-term energy investment.
Oil
Here's a commodity futures traders may not have expected to see on this list: Bitcoin. Yes, Bitcoin is technically a hard commodity and a very unique one at that. Energy costs are crucial to the production of Bitcoin because they determine whether it's economically viable to mine the cryptocurrency. Higher energy prices cause Bitcoin miners to sell coins to pay for energy which, in turn, lowers the price of Bitcoin.
As prices of energy commodities go up and assets like stocks and cryptocurrencies enter a bear market, the market is moving out of Bitcoin's favor. The price of Bitcoin is highly speculative and hard to predict based on fundamental indicators, but it's reasonable to expect Bitcoin's price to go down as it gets more expensive to produce. Shorting Bitcoin while at resistance levels could be profitable, but extremely high confidence in BTC makes it one of the hardest commodities to forecast.
Now that you know what it's like to trade futures, it's time to get familiar with futures trading platforms. One of the best online brokers for trading futures is TradeStation.
Stocks
They're a futures trading platform that offers trading tools that you can't get from your local futures brokers. Tradestation is perfect for trading any futures contract with ease.