Financial trading is by no means a new thing, and there are lots of tools and strategies that people have developed to gain an edge in the many different markets that exist. These tools and strategies can be very helpful, but some of them are only useful in specific situations or are only useful for a specific time in the market or for a specific market. This is why this article will deal primarily with strategies and tools for the two markets that we consider to be the longest-lived and most likely to be around longer than others. The two specific markets that this article will look at are the stock market and the commodities market and the tools and techniques that can be used with both, respectively.
The stock market
Just on the off-chance that anyone reading this needs to brush up on the basics of what trading stocks are all about, we've included this section. If you're an expert and eager to get to grips with the meat of the article, feel free to skip this section. In its essence, when you trade stocks you are trading in shares of public companies with the hope of profiting from fluctuations in the price of those shares. Many other financial markets have very similar structures to the stock market, so an understanding of how it functions will stand you in good stead elsewhere as well.
Keep up to date with tools, technology and news
It might sound strange, but one of the most important things that someone serious about trading on the stock market can do is to stay abreast of happenings that affect the market. Whether that be new tools for utilising a technique like RSI (Relative Strength Index), news that might affect one or more companies that you might be invested in or new technology that is being used to make trading simpler or easier, staying informed is key to success when trading stock.
The technique of fundamental analysis in stock trading
One of two main forms of analysis that traders use when playing the market, fundamental analysis is about taking a holistic view. Traders will attempt to analyse everything they can about a particular company or stock and determine if those factors will lead to growth or decline. It typically requires a fairly serious amount of research to achieve veracity with this technique.
The technique of technical analysis in stock trading
The other main form of analysis is typified by a focus on data-based analysis. The theory is that with no previous knowledge of a company, but with good knowledge of the historical movements of the market, a trader could look at the data patterns for a specific company and be able to identify, with reasonable success, whether that stock will rise or fall.
Having a diversified portfolio
This technique is all about reducing the risk to your capital by spreading out your investments in as many different places as you can. The idea is that if one investment falls apart or doesn't work out, then it won't lead to ruin, as you will still have many other active investments working for you. Diversification is a very popular risk management strategy in many different industries and markets, for good reason.
The commodities market
Trading in commodities is one of the oldest forms of trading known to man. The idea is that you buy up and sell valuable physical materials such as gold or oil or anything else that is typified by low supply and high demand. Rather than buying into the idea that a company will do well, you are actually purchasing a tangible commodity when you trade on this market.
The four broad categories
There are small specialized categories, but in broad strokes, there are four main categories that people trade in, those being: Metals, energy, livestock and agriculture. Each of these categories has unique dynamics and goods purchased within that category will have their own factors that will determine the success of trading them. Understanding those dynamics is the key to success when trading in commodities.
The technique of fundamental analysis in commodity trading
When we talk about this technique with respect to commodity trading, really what we are thinking about is supply and demand. Things like geopolitical events, weather and crop yields are all likely to have high impacts on supply and demand for various commodities, and as such, are very important for traders in this market.
Futures contracts
Futures contracts are part of the bread and butter of commodity trading. The idea is that these contracts lock both buyer and seller into making trades at predetermined times and at agreed-upon prices. While they can be used by savvy traders to control positions bigger than what their capital should be able to cover, doing so is risky.
Conclusion
When trading on the stock or commodities market, eschewing fancy strategies for tried-and-true evergreen strategies is the safe bet. Many of the strategies that work in one market, can work when applied to the other market as well, and could easily be applied to other financial markets than these two. Keeping up to date with news and advances in the technology used in both markets, for example, is crucial to most trading strategies that are used in either market.