Hi again, in the previous post, I was ranting about the basics of the commodity markets and explained only the crust of it.
I explained,
Market Participants.
Spot Market & Future Market.
Backwardation and Contango.
Volume & Open Interest.
COT report.
So, I wanted to dive into the next topics in detail to help you better navigate the market. Hopefully, by the end of this article, you will understand how to trade commodities more effectively.
So let's start and hope you make it to the end without sleeping!

Asset Classification
Hard commodities - are non-renewable assets with limited availability
Energy Crude Oil, Natural Gas, Unleaded Gasoline, Heating Oil, Coal
Metals Copper, Aluminum
Precious: Silver, Gold, Platinum, Palladium
Soft commodities - are renewable and classified into
Wheat: Winter, Spring, Red Wheat, Corn, Soybeans,
Meats Live Cattle, Feeder Cattle, Lean Hogs
Tropical Commodities Coffee, Sugar, Cocoa, Orange Juice;
Fiber Commodities: Cotton, Lumber
Inter Asset Relationship
So, like I mentioned before, there's a big connection between different commodities. It's crucial to grasp these connections to help build a solid trading strategy for various sub-assets.
Energy Market
From an Energy market perspective, there exists a significant relationship between Crude Oil, Gasoline, and Heating Oil. Gasoline and Heating Oil are derived from Crude Oil, hence there exists a pass-through effect between the three commodities.
There is at least a 60 -70% daily correlation between the three commodities. Hence, it is useful to try to understand which of the commodities would express a long/short view more.
In addition to core energy products, I would also like to briefly mention a potential correlation between Corn, Sugar, and Soybeans primarily because they are alternative energy sources for Ethanol. Hence, it might be useful to check the relationships here,
I think if you want to make an energy play, stick to the energy products.
Wheat Market
There are different varieties of Wheat products, due to the planting and harvesting season. Hence, depending on the period we are positioned in on the calendar and supply/demand imbalance, it is useful to watch how all the varieties of products are trading and the market sentiments behind it, then ultimately relating it to the core product Wheat itself.
Using the price difference between different types of wheat can give you some good hints for your trading game.
If there's a big price gap between when they plant and when they harvest, it might mean there's not enough supply, which could push prices up. So, if you buy wheat contracts before harvest time, you might make some money when prices go up due to the supply and demand situation.
Like I always say during our chats, it's a good idea to look for market opportunities, which are usually caused by imbalances in supply and demand, especially in commodities as there are always natural or synthetic disruptions in the market. It could happen in the form of the government increasing some kind of taxes on the wheat in the Indian market or maybe a drought in Africa.
after reading the previous post and this one as well I believe you must have a good theoretical grasp of how you can trade commodities effectively.
So, let me break it down in simple words how I trade in the market.
Choose the asset i.e. wheat, oil, or gold
understand the correlation with other products in the same asset class
look at the contract to trade and which exchange, if i want choose the spot or future contract of the product.
look at what is happening in the macro as the market gives you shocks if you don't look at the macro.
position the contract size according to my risk-reward ratio
it might feel like a lot of work but let me visualize it for you according to each market so you can build a concrete strategy around it.
AGRICULTURE PRODUCTS

LIVESTOCK

I have shared to some extent enough information for a trader to build multiple models around specific assets in the commodity market based on some systematic criteria.
I run all of my trading on multiple models, some parts of the model are a bit systematic but the process of performing the market analysis is largely chaotic.
The main takeaway is, that you should be able to synthesize all the information towards discovering where a trade opportunity exists, and constructing your views into specific markets, e.g you might have a view that supports a long commodity market trade, the next stage is how you intend to express that idea.
as always all the ideas in your head will sound amazing and make you feel like a genius trader like Michael Burry shorting the housing market and making millions in the process, so always remember no matter how good the idea is, it means nothing if you can't explain why and when.
one way I used to trade a couple of years ago was I did all the research created all my models and did exactly the opposite of what my bias was. so if it was a buy signal I got on my model I used to sell and if it was a sell I used to buy.
it's been a long time since I stopped doing that but it worked for me for quite some time.