Monitoring Commodities with Bollinger Bands  

Commodities are some of the most speculative and volatile markets to trade.  For this reason, Bollinger Bands shine in their ability to predict trends and show relative tops and bottoms in the commodities markets.

Adapting to volatility 

Traders must adapt to volatility and learn to trade in every market climate.  Commodities are one of the most volatile investments due to the fundamental changes in supply and demand (for example, a drought in the U.S. Midwestern Plains can send corn prices soaring while moderate rainfall ensures a steady supply of corn). 

Bollinger Bands help smooth out the fundamental changes and make the fundamentals show in the chart. 

Precious metals 

No market is as volatile as the precious metals markets.   Gold and silver are actively traded and influenced by changes in the manufacturing processes that consume the metals, along with changes in money supply and economic vitality. 

In the silver chart above, the N20 K2 holds the daily market activity perfectly over the course of two years.  The change in price for those two years was dramatic, rocketing from $14 per ounce to $21 before hitting its lows of $8.50 per ounce.   

The other metal 

Gold also moved wildly during much of the 2008 trading session.  All of its largest moves were contained by the Bollinger Band, which also predicted short term highs and lows and even controlled much of the short term stagnating market during the middle of the year. 

When the Bollinger Bands contracted to smaller widths between the two ambient Bands, the price changes soon became larger.  As you can see by the red lines on the chart below, a new direction emerged after a change in Bollinger Band width.   

Where to mix the fundamentals and technicals 

Commodities are surely difficult to trade, regardless of how the trader approaches each trade. 

While many traders thrive in the stock and currency markets with just one form of analysis, commodities traders must have a clear understanding of both the technical and fundamental indicators to make the best trading decisions. 

Commodities are the first markets to be manipulated by change.  When supply surges, prices drop; likewise when demand rises, prices rise as well.

Commodities and volatility 

Commodities are the most basic products.  The commodities list includes products such as corn, soybeans, wheat, pork bellies, gold, silver, steel, and a variety of other raw materials. 

A change in market dynamics on supply side, demand, or even a change in monetary base, can have a huge impact on prices.  For example, during the trading period of summer of 2008, commodities prices surged on higher demand and fears of inflation around the world. 

Obviously, the bubble burst as traders exited the market, resulting in periods of very high volatility.   When the market changes fundamentally, the effects will first be seen in one of the most important markets that drives the world: the commodities market. 

Further inducing the volatility of the commodities market is the amount of leverage that is available to traders.  High volatility is certain when leverage is larger.