Volatility Drivers In The Commodity Market
Commodity markets are known to be highly volatile when compared to the other asset classes that are traded. This is because there are some fundamental factors that could cause unexpected price fluctuations in this market and create short-term volatility. This makes it difficult for new traders to take a position in the market and protect their investments from losses.
To protect your investments in the commodity market when trading on the automated trading robot it is important that you be prepared of the things that could impact the market. There are some common volatility drives that affect the commodity markets.
The volatility that comes as a surprise is caused mostly because of the geopolitical uncertainty. Volatility is something that causes a rapid movement in the prices and when there is volatility in the market it makes it difficult to trade in the market. The uncertainty that happens globally can come in many forms.
Bad economic data or a geopolitical event that affects the oil-producing countries are some cases that could cause volatility in the commodity markets. Because of a negative outlook on the growth of the global economy, it will impact the commodities market heavily. If there is a slowdown in the manufacturing industry then the demand for commodities will also decrease.
The oil market in most cases takes the biggest hit in the case of geopolitical uncertainty. This is because the demand for oil decreases as companies now does not need energy in large quantities in their factories. This means that when you see a decline in the economic data this is a clear indication that the demand for oil is negative and is an opportunity to go short in the commodities market.
Changes in the weather
Unexpected weather changes what impacts the soft commodities market and its prices. Any weather condition that causes crop destruction and creates an inability for the farmers to produce as much as the previous year; causes the market prices of the crops to be highly volatile.
Any event that causes an impact on the demand and supply levels of soft commodities will change the valuations of the commodities. Take care to understand that if there is the destruction of crops then this means that the supply is low and this is a bullish event for the market. So in cases of severe condition of weather you need to go long in the soft commodities space.