• Understanding the Commodity Market

  • Over the years there have been thousands of books and probably tens of thousands of magazine articles and over a million blogs and internet sites with the search phrase “Understanding The Commodity Market”.

    Why is there so much interest in these markets? It’s because in my opinion it’s one of best ways for a person to make a living from home with a relative small amount of time commitment per day.

    Now with that said I do want to say that there can be a huge learning curve to learn to trade successfully. I’ve said for the past twenty years that learning to trade commodities is just using some common sense.

    However, it seems like almost every day there are new experts showing up on the Internet with the latest and greatest trading “systems”.

    Understanding the Commodity Market: The Basics

    Understanding the commodity market isn’t rocket science but what throws so many new traders off track is that some people want to make it far more complex than it really is. I think the reason they do that is to try and make themselves feel important and to make others think that if they want to learn to become successful in trading commodities then they must buy their newest indicator, book, software or subscribe to their get rich quick newsletter.

    How do I know this? It’s because it happened to me when I first started to learn to trade, over 20 years ago. I bought hundreds of books and back then video tapes, to learn to trade. I read and studied them all. The more I read, the more confused I got. Simply put it was information overload. Ever been there?

    Then one day the light went on for me. What I found was that there are certain “rules” that all successful traders all use. It’s called in one form or another “technical analysis”. But just what is technical analysis? It’s exactly what it says it is; analyzing the markets technically.

    All traders that I know all use this in one form or another. If you are going to become a successful trader you need to at least learn the basics of technical analysis.

    A good starting point are things like support and resistance levels, trend lines, chart patterns and certain seasonal tendencies in every market.

    This short article can’t go into all the topics mentioned above but they are covered in my course Common Sense Commodities.

    For now, let’s just talk briefly about support and resistance lines. Think of a support level is where price has dropped down to and bounced back up. You will see many times that these support areas are hit more than once as price drops down hits it, bounces back up drops back down and hits the support level and bounce back up again. These are known as double bottoms and even triple bottoms.

    Sometime the price will come down to exactly the same price and bounce but what is more common is that price will come down to a certain “area” and bounce back up. It may be within two or three ticks of the prior support area and then bounce up again.

    These support areas can be a great place to take profits if you are already short the market or a great place to buy the market (go long) if you are not already in the market.

    On the flip side of this coin are resistance areas. They work the same way except price rallies and hits a resistance area and then drops back down again. Think of support as the floor and resistance as the ceiling and price as a rubber ball that bounces between them.

    It doesn’t matter which time frame you are looking at either. They will all have support and resistance areas.

    Since most charting software today uses green for bars and candles that are bullish and red for bars and candles that are bearish I like to use the same color combination for drawing support and resistance levels on my charts.

    Take a look at the chart below which is the Daily Contract for Silver. From this you can see both a support and resistance line and a support and resistance area. Sometimes, like I said, it comes down to the exact same tick while other times it a very narrow area.

    Understanding the Commodity Market

    As we progress I will show you ways to trade these support and resistance areas. Right now I just want to you be able to see what they look like on a chart.

    Understanding the commodity market starts with the basics and progresses from there. I think that all traders would agree with support and resistance is probably the most basic place to start.