Top 3 External Factors Affecting Commodity Trading

Geopolitical Events

Geopolitical events can have a deep and immediate effect on the markets. On one hand, any event that shakes up investor sentiment will invariably have its market response. 

On the other hand, geopolitical shocks can also affect institutional algorithmic trading systems, prompting them to buy or sell a massive volume of futures contracts in an instant.

Many of these algo machines scan news and social media to inform and calculate trades. 

They can open or liquidate positions instantly. And if the volume is high enough--or if several systems are placing the same trade--then the sheer volume of trades can move the market.

Whether you are a technical or fundamental trader, these types of events can have a major positive or negative impact on your account, as geopolitical events often disrupt the balance of the markets.

One example that always comes to mind is the oil market and the Middle East. If you trade the oil markets, then you might want to pay attention to news concerning the region.

Another example that comes to mind is in the area of forex. The “Brexit” issue has tremendously affected not only GBP (British pound), but also other currencies such as the euro, swiss franc and others. Flow of “good news” and “bad news” move the currency markets.

Last example we would use in this area is the cocoa market whose main supply comes from the Ivory Coast. This area is prone to political instability and the slightest concerns of “revolution” would send the price gapping up.

The examples above tell us that it doesn’t matter whether the news reflects fundamental changes to market structure or just mere market sentiment. Both can move the markets. And place your positions at significant risk.

Final note on this issue is to pay attention to a contract’s liquidity. The less liquid the contract, the more violent its moves can be.

Economic Cycles

You’ve probably heard the term “economic cycle” or “business cycle.” Both terms are synonymous, and they refer to the economy’s fluctuation between expansion and contraction; growth and recession.

Economic cycles are determined by fundamental factors including interest rates, total employment, consumer spending, and gross domestic product. 

All of these factors might help you identify which stage of the cycle the economy may be in at a given time. 

Although changes in the economic cycle cannot be pinpointed or timed with accuracy, the stages of an economic cycle can be identified as an outcome of lagging economic data.

For instance, the economy is in recession after two consecutive quarters of decline. 

Although we can confirm, by looking back, that the economy is in a recessionary period, it’s much harder if not impossible to predict when a recession will begin.

Seasonality

Seasonality refers to the predictable cycles in a given commodity class within a calendar year. 

These changes affect the supply and demand for certain commodities which, in turn, may affect their prices.

For instance, the demand for heating oil tends to increase during the Winter months, and so heating oil prices also tend to rise. 

Similarly, the demand for gasoline tends to increase during the summer months, as vacationing and travel tends to ramp up. 

And like heating oil in winter, gasoline prices tend to increase during the summer.

Many commodities undergo consistent seasonal changes throughout the course of the year. 

Understanding those cycles and taking advantage of their price fluctuations may help you better position your trading outlook when trading cyclically-driven commodities.