Trading strategy: COMMODITIES FORECAST

Description

The Commodities Forecast strategy is a swing trading strategy used to trade commodities. Traders usually implement the strategy in parallel on several commodities. The reputed World Bank regularly publishes high quality analyses of all commodities. These analyses can be freely accessed. Particularly interesting for traders are the Worldbank’s estimated price forecasts. The strategy uses these price forecasts.

The Commodities Forecast strategy determines a channel based on an average price. If the average price is below the Worldbank’s forecast, the strategy will be at particular points in time. If the average price is above the Worldbank’s forecast, the strategy will sell short at particular points in time.

 

   
Suitable for : Commodities (oil, gold, silver, wheat ...)
Instruments : Futures and CFD
Trading type : Swing trading
Trading tempo : Variable, depends on the commodities traded
Using NanoTrader Full : Manual or (semi-)automated

 

The strategy in detail

The estimated price forecasts published by the Worldbank can be found here.

 

This example shows the price forecasts for the energy sources crude oil, coal and natural gas. The forecasts are estimated average prices for the year. The crude oil price forecast for 2017 is currently (Q4 2016) forecast at $ 55,20.


 

This example shows the forecasts for the precious metals gold, silver and platinum. The crude oil price for 2017 is currently (Q4 2016) forecast at $ 1.219.

The Commodities Forecast strategy trades around a channel based on an average price determined by the strategy.

The average price

Crucial is the average price. Below you can find an example which illustrates the formula used to calculate the average price. The table shows the strategy’s average prices for 6 commodities. The table changes on a daily basis. The changes, however, are small. It is not necessary to change the average price in your platform on a daily basis.

The formula to calculate, for example, the average crude oil price ($48,48) on 7.12.2016 is:

1. Calculate the difference between the World Bank forecasts for 2016 and 2017
Crude oil = $ 55,2 - $ 43,3 = $ 11,9

2. Calculate the number of days to go between today’s date and the middle of 2017 (1.7.2017)
From 7.12.2016 to 1.7.2017 = 206 days. 206/365 = date factor 0,564

3. Delta = $ 11,9 x 0,564 = $ 6,72

4. Average price = World Bank 2017 forecast - Delta = $ 55,2 - $ 6,72= $ 48,48

When to open a position?

Scenario 1: forecast > average price

If the World Bank’s forecast is above the average price then the trader is only interested in buy signals. A buy signal occurs when the market price drops out off the channel.

 

This example is based on an average price for crude oil of $ 48,48 (blue line). The World Bank’s forecast is $ 55,50. The trader is interested in buy signals. The channel is $ 48,48 +/- $ 5. The bottom of the channel is $ 44,25. When the price drops below this level, a position is bought. Two buy signals occur.

Scenario 2: forecast < average price

If the World Bank’s forecast is below the average price then the trader is only interested in short sell signals. A short sell signal occurs when the market price breaks upwards out off the channel.

 

This example is based on an average price for gold of $ 1.236,50 (blue line). The World Bank’s forecast is $ 1.219,00. The trader is interested in short sell signals. The channel is $ 1.236,50 +/- $ 50. The top of the channel is $ 1.286,50. When the price goes above this level, a short sell position is opened. One short sell signal occurs.

When to close a position?

The Commodities Forecast strategy is a swing trading strategy. Both the price target and the stop are relatively far away from the market price. The price target is usually around 2% to 5%. The stop can be the same percentage so the return/risk ratio is at least 1.

 

In this example the position reaches the price target set at 5%. The stop was set at the same distance.

The trading strategy settings

The settings are simple. They are, as usual, set in the DesignerDialog window.

Average price: the strategy’s average price.
Differential_points: the width of the channel, set it to about 10%.
Long_signals: select ‘yes’ or ‘no’ to indicate if you want long signals or not.
Short_sell_signals: select ‘yes’ or ‘no’ to indicate if you want short sell signals or not.

Always select either long or short sell, never select both.

 

This example shows the settings for crude oil. The current average price is $ 48,48. The width of the channel is the average price +/- $ 5. The World Bank forecast for 2017 ($ 55,20) is above the average price ($48,80), the trader only want buy signals.

A basket of commodities

The Commodities Forecast strategy is a swing trading strategy. The number of signals per commodity is limited. Positions are usually held a days but rarely weeks as commodities tend to be volatile. Traders usually apply the strategy in parallel to a selection of commodities. The most popular commodities are gold, silver, crude oil, natural gas, copper and wheat.

Conclusion

The Commodities Forecast strategy trades on the basis of price forecasts provided by the reputed World Bank. These forecast are based on objective research and are considered to be of good quality. When the actual price deviates significantly from the forecast the trader will either take a long or a short position. The price target and stop on an open position are quite far from the market price in order to give the price sufficient room to move.

Practical implementation

Using the NanoTrader Full follow these steps:
  • Select the financial instrument you wish to trade.
  • Open the chart of the instrument.
  • Open a chart using the template study "WHS Commodities Forecast".
  • Adapt the settings as described above.
  • If you want to trade semi-automatically, activate TradeGuard+AutoOrder. If you want to trade automatically, activate AutoOrder.