Commodity trading is like the lesser-known cousin of stock trading. While stock trading refers to speculating, buying or selling stocks, commodity trading refers to the purchase and sale of trading commodities such as crude oil, metals, crops, livestock and so on through regulated exchanges. Commodities in India are traded using futures contracts and options. START COMMODITY TRADING-
Generally, commodity trading is considered to be riskier than equity trading due to the high volatility of prices of goods traded. The goods on the commodities market are extremely sensitive to changes in the economic environment and are affected adversely by demand and supply shocks. Due to these reasons, only highly experienced traders foray into commodity trading. While trading on the commodities market, it is important to keep yourself updated with the latest information and stay on alert so as to spot any fluctuations immediately
Before you can begin trading, you must first educate yourself about the benefits and risks attached to commodities trading. Following this, study and understand the technical terms, abbreviations and jargon relating to this kind of trading. Furthermore, read up on how you can conduct fundamental and technical analysis on the commodities and how to estimate the right time to invest.
After having done all of the above, this is how you can begin trading in the compute market.
- Choose an Exchange – START COMMODITY TRADING- India has six national and several regional commodity exchanges. The national exchanges are listed below-
-National Multi Commodity Exchange (NMCE)
-Multi Commodity Exchange (MCX)
-Indian Commodity Exchange (ICEX) -The Universal Commodity Exchange (UCX) -Ace Derivatives Exchange (ACE) -National Commodity and Derivatives Exchange (NCDEX)
Carefully choose an exchange based on the commodities you intend to trade in since different exchanges specialize in different types of commodities. Your ideal teck will be the one that has had the longest history of trading in the commodity that you wish to trade, among other factors.
- Select a Broker and Create an Account –START COMMODITY TRADING – After having chosen an exchange, select a broker through which you can conduct transactions. The four most popular ones in India are –
While choosing the broker, consider factors like brokerage and other charges, margins and annual fees alongside the quality of services offered. Also, ensure that the broker is SEBI approved.
After choosing the broker, create an account with their platform. For this you will need documents like – Aadhar Card, PAN Card, a cancelled cheque showing IFSC or MICR code and income proof.
Once the broker has verified your documents, your trading account will be created and you can now conduct trades through this account.
- Deposit Money and Start Trading with a Plan of Action – Make an initial deposit to begin trading. The initial deposit must be about 5%-10% of the contract value. But before you do so, it is essential to formulate a plan of action which maps out all of the possibilities and scenarios. It is crucial to not deviate and stick to this plan except perhaps during extremely adverse conditions.
TIPS AND TRICKS- START COMMODITY TRADING
Once you are finished with all the formalities and start to formulate a plan of action to begin trading, you might see that strategies are of the utmost importance while trading in the commodities market. Keeping the following tips and tricks in mind can help formulate a great strategy which will help you gain profits-
- Diversify: Do not invest all your money into one commodity. Select a few promising commodities and invest accordingly to minimize risk. Similarly, do not invest in too many commodities as this can reduce the level of profitability.
- Identify Range: Generally, prices of commodities keep swinging within a particular range which depends on their volatility. Study further into the nature of the commodity and take your position at the right time based on demand/supply factors or historical data in order to gain profits out of this.
- Track Inflation: Inflation is one of the key factors that affects the prices of commodities. Usually, inflation is positive for almost all commodities. When you track inflation, you can make rational predictions for how you expect it to move and then you can take your position accordingly.
- Track Currency Variations: Some goods are highly dependent on currency values, like with gold and oil which are highly influenced by the value of the American Dollar. Track the currency that influences the commodity you are trading so as to gain valuable insights into its movements.
- Be Aware of Current Affairs: Staying informed of trends and happenings around the world is your best bet to earn profits. Using this knowledge, you are able to predict the trends of commodities and take positions accordingly. For instance, you read about unfavourable weather conditions in Brazil which is the largest supplier of cacao. From this, you can expect that there will be cacao shortages soon and that the price of cacao will rise soon. With this knowledge, you can take the appropriate position and earn profits.
- Use Stop-Loss: Stop-loss is when a commodity automatically gets sold or bought when its price reaches a predetermined value. You should evaluate how much loss you can afford to bear and set the stop-loss level of price accordingly. This is helpful as it prevents you from suffering through massive losses.
- Bandwagon Effect: Do not be hasty and take a position just because several others are doing so. Several traders fall prey to this bandwagon effect. Apply your own discretion and carefully consider each and every move. There should be a good rationale behind every trade.
- Proceed Slowly: Many investors trade for the thrill, this is not a healthy attitude since it takes time, patience and some serious effort to make good trades. Beginners especially should not trade aggressively, rather progress gradually.
These are some of the tips that might prove to be helpful while trading. Remember that commodity trading requires skill, intuition, time, effort and is a serious commitment. Be equipped with the necessary skills and knowledge required before you begin trading. Doing all of this will enable you to have a successful run at the commodity trading market.
Trustline is one of the best stock brokerage firms in India. As a reputed financial services company, Trustline allows customers to start trading with the facilities of all major Stock/ Commodity/ Currency exchanges for corporates, institutions & retail investors.