Trading Commodities and Foreign Exchange

This is a guest post from Tusk Trader, an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

Commodities and currencies are becoming increasingly popular for people to trade and invest in. Oil, silver, and the economists favorite, copper, are becoming as popular in investing circles as TD and BCE. These complex commodity and foreign exchange markets are interesting, dynamic, and dare I say, fun. (I know fun is different for everyone. I also like risky activities like heli-skiing and driving in Quebec.) These exciting markets are where geopolitical forces combine with stock market moves to produce unique trading opportunities. Valuable information can be found everywhere from publications like the Economist to the Northern Miner. Those two publications and a bottle of Shiraz can leave me content for hours.

Investors need to understand these entities are harder to get a handle on than a regular play in the stock market

Corporations are complex but they function in a very linear way. Bad news pushes the stock price down while good news pushes it up. Think of a group of people pulling on a rope in a game of tug of war. Good sales and new market technologies trying to pull the stock higher, while a bad economic outlook and high costs try to pull it lower.

When you look at currencies and commodities, it is more like a hula-hoop. Some people are lured into trading these entities because they are told they are simpler than stocks. They are actually more complex because of the economic conditions that completely dominate their movements. So many different forces, all interconnected, pushing and pulling at the same time to come to a price. If an investor has an idea for a trade on a commodity, they not only have to have the event they predicted be correct, but also that event has to be an overwhelming force in the market of that commodity or currency to have the desired movement. Events can easily get overshadowed. If you think gold is going to have an over supply coming on the market, you could be right, but if the US dollars takes a dive for any reason (related or not) the price of gold could get a major boost just from that.

The hula-hoop can get pulled in any direction by multiple forces at the same time; you as an investor are picking the strongest puller. It is a hard job picking the toughest guy in the playground, but that is what trading currencies and commodities are really about.

Thanks Tusk. Make sure to follow Tusk Trader on twitter: @tusktrader

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