Commodity trading systems are systems, almost always computerized, designed to more accurately pick what to buy or sell on the financial markets. They work by attempting to quantify the different factors which could affect a commodity’s future market performance. There have been government warnings about sellers of such systems exaggerating how successful they are.
Despite the name, commodity trading systems do not necessarily have to be limited to physical commodities such as grains or metals. They can also be used for more complicated futures markets where buyers and sellers effectively bet on what prices will be at a future date. The complexity, potential and limitations of a system can vary greatly depending on the particular market. In some cases, a system may be used to pick out commodities which are likely to fall in value as some investments can make money from drops in prices.
Commodity trading systems fall into two main categories. Trend following tries to pick out particular markets which are consistently moving as a whole in a particular direction. Range trading is aimed at markets which aren’t moving as much overall. Instead, these systems try to pick out individual commodities which are likely to change. As a very generalized rule, people using range trading systems tend to buy and sell more often and in smaller amounts than those using trend following systems.
Nearly all commodity trading systems work by following a formula based on factors which can affect either a market or a particular trend. In theory, choosing a system is a balance between simplicity and lower prices on one hand, and using a wider range of factors on the other. In reality it isn’t this simple, as there is a great deal of disagreement over how important particular types of data are in making accurate predictions.
There are several independent services designed to help people choosing between different commodity trading systems. These aim to give a fair comparison of how different systems have performed historically. Some services will only use data from genuine trades by people who were using the system. This helps get round the problem of sellers creating a system specifically designed to look good when you apply it to past market movements.
The United States Commodities Futures Trading Commission has issued warnings for people to take care to avoid systems marketed using fraudulent or misleading tactics. It notes that hypothetical results based on past events can be misleading as they don’t take account of real-life limitations such as delays in getting financial data, traders making mistakes, or the effects that carrying out such trades would have had on the market. As with all forecasting systems, it’s always worth bearing in mind that if a system worked as well as some sellers claim, they could make more money using it themselves than selling the system. No system is guaranteed and systems which seem too good to be true usually are.