Trend following in commodities is simple at heart. Most days you lose a little. But when a big trend shows up, you can win big. That’s why traders love it. Even with a small account, you can make it work if you stay patient.
Back in 2008, when the world was in financial panic, one group of traders wasn’t scared. They were trend followers. While stocks crashed, they made huge gains by riding moves in oil, metals, and farm goods. That was proof for me – trend following works when it matters most.
Since then, the profits haven’t always been as strong. But the idea still makes sense. Unlike most strategies that make small profits often and then blow up, trend following flips the script. You lose small most of the time, then hit rare but massive wins.
Why Commodities Trend
Commodity markets move in trends for real reasons – not magic.
Farmers hedge crops, oil producers lock in prices, and miners protect against price drops. These players care more about safety than squeezing out every dollar. Because of that, they’re willing to trade at “less than perfect” prices.
This creates steady pressure that pushes prices in one direction. For example, a natural gas storage operator will hedge inventory every year. When many do it at the same time, prices move together.
On top of that, people react slowly to new info at first (underreaction) and then go too far later (overreaction). Together, these habits create long-lasting price moves.
Researchers have studied over 100 years of data, and these effects keep showing up – through wars, recessions, and new tech. Trends in commodities are not just theory. They are real and tested.
Isn’t Trend Following Dead?
You might have heard people say, “Trend following doesn’t work anymore.” Or, “Too many traders are using it.”
That’s only half true.
Trend following moves in cycles. In the 1980s, it was a golden age. Some professional traders (called CTAs) made over 30% a year. Later, in the 1990s and 2000s, the profits got smaller as more people joined in.
But here’s the key: the strategy didn’t die. It just cooled down.
And when big crises hit, trend following shines. In 2008, while most investors lost money, trend followers gained 40% by betting against stocks and buying into volatility.
Yes, returns are noisy. Some years are bad. But just when everyone says it’s finished, trend following comes back. In 2022, when both stocks and bonds crashed, trend followers had one of their best years in a long time.
The truth is simple: if you expect steady profits every month, you’ll be disappointed. Trend following is about waiting. Most days you lose small. But when a big move finally comes, you win big. That’s how the game works.
How to Actually Trade Commodity Trends
Okay, so how do you trade trends in real life? There are a few classic ways:
1. Price Breakouts
This is one of the oldest tricks. You buy when the price breaks above a recent high and sell when it drops below a recent low.
Example: Buy when price goes above the last 20-day high. Exit when it falls below the 10-day low.
It’s simple, and it has worked for decades across many commodities.
2. Moving Average Crossovers
Another method is using moving averages. You buy when a short-term average (like the 50-day) crosses above a long-term one (like the 200-day). You sell when it crosses back down.
There’s nothing magical about the 50-200 pair. Smart traders often test different averages or even use a mix of them for safety.
3. Risk Management (The Secret Sauce)
This is what separates serious traders from casual ones. Good risk management means:
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Volatility targeting: Trade smaller when markets are crazy, bigger when they’re calm.
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Correlation control: Don’t double up on the same type of trade. If you’re long on crude oil and heating oil, that’s basically one bet.
Notice something? None of this is about predicting the future. You’re not guessing where oil will be in six months. You’re simply reacting to what the market is already doing.
Trading Commodity Trends with a Small Account
You might be thinking, “This sounds good, but I don’t have half a million dollars to trade futures.”
The good news: you don’t need that much.
Today, you can trade micro futures contracts. These are smaller versions of normal futures—usually just 1/10th the size. Many require less than $1,000 in margin.
The downside? They can be harder to trade because of lower liquidity. But they make trend following possible even for retail traders.
Here’s a simple way to start if you have around $50K:
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Pick the right broker. Look for one that offers micro contracts like MGC (micro gold) or MCL (micro crude oil).
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Start small. Don’t try to trade 20 markets at once. Begin with just a few liquid ones like crude oil and corn. Add more later.
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Use a simple system. A moving average crossover is a good start. Keep it basic—you can always add more rules later.
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Size your trades wisely. Risk less when markets are wild, more when they’re calm.
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Be realistic. With a small account, your returns will bounce around a lot more than a giant hedge fund’s.
Yes, costs are higher for small traders. Spreads are wider, and fees are bigger compared to your trade size. But that doesn’t mean you can’t succeed.
And if managing trades feels like too much, you can even buy ETFs like DBMF or CTA, which already follow trend strategies.
The key is to set the right expectations. Trend following won’t make money every day. It’s a diversifier, not a magic money machine.
The Psychology of Trend Following
Here’s the tough part: trend following messes with your mind.
Most of the time, you will lose. Win rates are often below 40%. That means you’ll be wrong more often than you’re right.
Worse, you can face long drawdowns – sometimes years of slow bleeding before a big win shows up. Imagine losing money for 3 or 4 years straight. Most traders can’t handle that.
It’s a lot like venture capital. Most start-ups fail, but the few that succeed cover all the losses and more. Trend following works the same way.
The problem is, you never know when the big trend will appear. So you keep taking small hits, waiting for that one big move. It feels boring and painful.
If that sounds too hard, that’s okay. There are other ways to protect your portfolio, like buying index puts (though they usually lose money over time).
But here’s the truth: the only wrong approach is expecting trend following to be easy or a free lunch. It’s not.
Why Trend Following Still Matters
Even with all its pain, trend following has some big advantages:
1. A Different Return Profile
Most trading strategies win often but lose big once in a while. That feels good – until the big loss comes.
Trend following is the opposite. You lose small most of the time, then make huge wins once in a while. This makes it a true diversifier, because it behaves differently from almost everything else in your portfolio.
2. Inflation Protection
When inflation rises, trend following usually beats plain “buy-and-hold” commodity baskets. Why? Because it shifts into whatever is trending, and those trends often get stronger when inflation is high. That’s what happened in 2022.
3. Crisis Alpha
During market crashes, trend following often performs well because it can flip short. In 2008, many trend funds gained while stocks fell 40%. Results vary in each crisis, but overall it helps reduce equity risk.
4. New Market Opportunities
Old, mature markets sometimes trend less. But new ones – like EU carbon futures, power markets, or even crypto often show strong trends. Trend following adapts and finds fresh opportunities.
Getting Started: A Practical Plan
If you want to try trend following, here’s a simple plan:
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Set the right expectations. Trend following is slow and painful most of the time. Look at data, backtests, or even paper trade to understand what the journey feels like.
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Start small. Don’t make it complicated in the beginning. Trade just a few markets or use one simple system.
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Diversify when you can. The strategy works best when you spread it across many trades, markets, and signals. That smooths out the ride.
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Expect pain. You will lose for long periods. That’s normal. The big wins come later.
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Focus on the process. Judge yourself by how well you follow your rules, not by short-term profits.
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Grow slowly. As you get comfortable, add more markets and methods to increase your edge.
Think of trend following as just one piece of your portfolio, not the whole thing.
Conclusion
No trading strategy is perfect. All of them have good times and bad times. The best ones simply make more than they lose over the long run. Trend following is the classic example of this. It’s often frustrating. You take lots of small losses. You wait around for years sometimes. Then suddenly, when you least expect it, the big trend comes and it pays for everything.
The catch? You can’t predict when the trend will start. All you can do is spread your bets across different markets, stick to your system, and wait.