Reviewing the Essentials of Commodity Spreads Trading

Professional commodity traders often focus on trading spreads, which involves the simultaneous purchase of a commodity and the sale of another, usual similar, commodity. Spread positions tend to be less risky than long or short positions on commodities.Essentials of Commodity Spreads Trading

In the grain market, for instance, traders often buy one grain and sell another at the same time, such as buying December corn and selling December wheat. In this example, the trader expects the corn market to be stronger than the wheat market. As long as the price of corn moves higher than wheat, or at least stays above the wheat price if both decline, the trader will make a profit.

One type of commodity spread is the Intra-Market Spreads, often called Calendar Spreads, though there are many other types of commodity spreads. Intra-Market Spreads involve the buying and selling of different contract months within the same commodity. For example, a trader can buy May soybeans and sell November soybeans.

With the Inter-Market Spread, traders buy and sell different but related types of commodities, such as gold and silver. The Inter-Exchange Spread involves the simultaneous purchase and sale of the same underlying commodity trading on different exchanges. For example, a trader could buy December wheat futures traded on the CME Group and sell December wheat futures traded on the Kansas City Board of Trade. A trader can find almost any kind of commodity spread to meet any outlook on the markets.

Chartered Market Technician (CMT) Matt Choi is the founder of trading education company, Certus Trading, which provides detailed training courses to traders and investors to help them understand the market and develop their own personalized trading strategies.

The courses offered by Certus Trading include one on trading commodity spreads.  This is a comprehensive program where Matt Choi instructs his students on how to identify and take advantage of the best commodity spreads on the market. Students learn how to structure spread trades and trade commodities and come away with a better understanding of how supply and demand and seasonality dictate prices across all types of commodities.

“I prefer looking at the micro opportunities versus the macro, which is the daily movements of stocks, options commodities, and currencies,” Matt Choi said in a recent interview. “I look for repetitive patterns that appear so that when I see that same pattern again, I won’t be far from it and I will have a strategy that I derived to trade that specific pattern.”

Trading commodity spreads can be complicated. But if you’re willing to take the time to learn about the topic and go beyond the basics, you’re well on the way to becoming a successful commodities trader.