Greeting Traders, and welcome back to another Survival Guide.
Chris here, bringing you some more information that will
hopefully allow you to progress further in your trading career.
Whether you're just looking to become a better trader, or
perhaps you're looking to pass the Gauntlet Mini.
Today we're going to be discussing the top volatility-filled
commodities markets out there that we feel are worth paying attention to.
As being a trader goes, we do know that volatility and opportunity
are hand in hand. We need that volatility to find those sweet opportunities
so it is important to be aware of which markets have that
volatility. Now without further ado, let's go ahead and
dive on into the materials that follow so we can learn about
which markets have the volatility and whether or not we want
to invest our time in them.
Speculative traders thrive on volatility. Whether we're
looking at crops, minerals, or even oil.
It's often very surprising to traders when they realize how
volatile commodities can actually be.
But like any other investment market, the price usually is
boiling down to a simple supply and demand issue.
Identifying the markets that seem to have the most supply
and demand issues generally goes hand in hand with finding
markets that have more volatility.
At first glance, it might be challenging for traders that
aren't involved in the commodities markets to really feel
like they should care about the volatility in the commodities
markets. But the truth is the markets are connected.
A report by Oliver Wyman showed some very interesting information
on how the volatility in the commodities markets impacts
a variety of investment markets.
One of these statistics that he published was that commodity
price swings are the second largest driver of earnings uncertainty
at publicly traded companies.
Then also, he wrote about the fact that 23% of senior
financial professionals consider commodities to be the primary
driver of their earnings variability.
Just understanding these types of connections, we can
very easily begin to understand how our other investments,
maybe it'd be a stock in a particular company, can have an
impact, or should should be impacted by the volatility in
the commodities markets themselves.
Volatile commodity markets have been described by some traders
as a trader's paradise, and there's quite a large number of
reasons that should incentivize the trading of volatile commodity
markets. The first is the mix of investors and traders does improve the liquidity.
The more liquidity we have, the better we'll be able to get in and out of trade.
This is always a net positive. Then we have the increased
liquidity allows the traders to deal in significant contract
sizes. Because the market is so liquid, we can get a very
large number of contracts opened and closed in a relatively short period of time.
Next, commodity markets do tend to be more transparent
and influenced to a lesser extent by government activities.
So if you don't like the sudden fluctuations caused by government
reports, well the commodities markets aren't so prone to
those movements. Then we have the constant dealing by arbitrageurs
who will quickly subdue pricing anomalies.
This means that because of the arbitrage coverage, there
will be less crazy anomalous swings that occur because it'll
be brought under control relatively quickly.
Volatility, of course, is also important in futures.
The traditional measurement of volatility is standard deviation
around the mean of an asset price and the average of an asset
price. If a commodity price is relatively close to the mean
or average, then the standard deviation is relatively small.
The highs and lows of the price deviates significantly from
the mean average, indicating relatively high volatility.
In theory, the higher the standard deviation, the
higher the potential investment return.
That is the perfect scenario for many futures traders.
The leveraging effect of options and futures contracts on
a relatively volatile commodity can create a very precarious
situation. The greater the degree of commodity price standard deviation,
the greater the effect of leverage on the options or futures prices.
It is extremely important because of this to be very careful
because we can magnify those negative swings when we're not
paying attention. It's also vital to realize the low to negative correlation
between traditional stocks and bonds and commodity prices
themselves. While the macroeconomic outlook will impact the
investment markets to a certain extent, commodities have
different influences than stocks and bonds themselves.
Consequently, you can effectively trade in two very different
investment markets due to the lack of direct correlation.
To give ourselves a better sense of understanding around
the relative volatility in the commodities markets, let's
take a look at various asset classes here where we can see
their quarter volatility range.
As we can see, starting off at the top, the E-mini S&P 500
had a 5.35 to 27.23% volatility range. Relatively stable
by most people's standards.
Then when we work our way down on to something like, say,
silver at the very bottom, look at this range here.
We go from 10% to 100%.
We have a very, very wide range. A lot larger than the, say
22% or so range of the E-mini S&P 500.
The type of volatility has been very different depending
on the market of which you are taking a look at in the commodities
world, but the point is this will give you some of the most
common and most popular commodities markets that have a very
"reasonable" volatility range that is attractive to many traders.
All of these markets are attractive to the right trader,
but it's up to us to figure out which type of volatility
best suits our personal risk tolerance.
When it comes to the king of commodity volatility,
Bitcoin does try to set itself out from the pack. Look at this chart.
It is just absolutely insane. In 2014, that's when this chart
begins, it's only a few years, relatively speaking of data,
and it stops in present time at 2021 at the recording of
this video, and we can see that in 2014 to 2021, we we
saw a rise of over $65,000 in value. Being close to
near $0 in 2014, relatively speaking, to almost
$65,000 in 2021 before whipsawing back down to somewhere
around the $40 to 35,000 mark
as present day. The volatility is undeniable.
The swings are in the thousands of dollars, and it's really
hard to find any other commodity that behaves as erratically as Bitcoin does.
Now let's take a look at one you may not be expecting, and
that is cotton. Cotton is indeed known for its volatility.
This is a 45 year chart, so covering a lot more time here than the Bitcoin chart.
Because of things like global stock piles, government policies,
global demand, climate, substitutes for cotton itself,
oil prices even, and the value of the US dollar, we have
watched the prices of cotton go up and down erratically for a very long time.
This is definitely one that you're going to want to pay attention to
if the volatility interest or the volatility bug has bitten you.
Then we have soybeans.
Soybeans, a staple of our economy, is actually one of our
most volatile commodities that we can trade.
Its chart doesn't look too different from cotton at a first glance.
This is a chart that covers roughly the same amount of time.
It goes back to right around 1970 to presently right around 2021/2020.
With this we can see that price has been quite erratic.
But once again, when we put it in comparison in terms of
actual currency numbers that have changed, meaning going
from $4 to $6, it is still hard to compare
to Bitcoin going from something like $0 to say
$65,000 so nothing is really going to compare to that,
so we have to look at the path itself and look at percentage
gained and lost and take that into consideration when measuring volatility.
Crude oil is another one that is an extremely volatile commodity.
This should really come as no surprise. As we run into,
say, OPEC policy changes or a disruption of the supply like
we just had with the hacking of the pipeline in the US, or
global warming, or the politics surrounding the oil itself,
whether it's something correct for us to do morally, or whether
it's something incorrect for us to do, how is it impacting the weather.
All of the different things that you could possibly think of
do impact the price of crude oil, which does make for
a very erratic field at times, because not all of those factors
do coincide and correlate perfectly together.
Crude oil, another very high volatility type of asset,
if you are looking for a commodity that does express its
volatility on a daily basis.
Some other noteworthy mentions as far as a very volatile
commodity goes; we have silver, we have gold, we have sugar
and we have coffee. On one side of the spectrum
we have the precious metals, silver, and gold.
These are always going to be extremely volatile because their
value does go up and down, almost inversely to currencies
that are not stapled to them.
Then we have sugar and coffee, where all of a sudden a quick
shift as far as a trade agreement between two countries,
as far as exports and imports go, could very suddenly cause
an erratic price movement in either of those
if it is impacted. So sugar, coffee, gold, silver,
it doesn't matter if it's crude oil or what it is that you decide to trade.
But as with all things, we strongly recommend checking it out
for a long period of time before you actually execute
any trades based on a strategy
if it was built on a previous asset. Use that demo account
to your advantage and practice, practice, practice before you go live.
But until next time, thank you for joining me
as always, folks. Best of luck in the markets. I will see you all very soon.
Don't forget to hit that like and subscribe button down below
so I can keep coming out with content for you all.
I will see you soon. Over and out. Bye guys and gals. Ah, everybody.