Commodity trading is distinct from other types of trade. Equity is the most actively traded financial product on the Indian market.
Beginners must thus relearn about stocks in order to explore further into commodities. This is due to the greater volatility of commodities compared to equities and bonds. Nonetheless, this extreme volatility gives abundant opportunities for traders to profit from market movements.
The prices of commodities are affected by variables such as supply and demand, as well as events occurring beyond the realm of financial markets, which may not impact the values of stocks and bonds.
Consequently, you must first forget all of the investment methods, tips, and tricks you’ve previously learned about trading and investing in stocks. You must also recognize the distinctions between commodities trading and other kinds of trading.
Now let’s examine the tips and tactics a novice in commodity trading needs to know to succeed on the commodity trading in India:
Diversify
You must have the humility to acknowledge that despite countless projections, detailed analyses, and technological research, errors are inevitable. However, a good trader is not one who never incurs losses, but rather one who predicts them and diversifies his portfolio over many commodities such that losses in one group are offset by profits in another.
In addition, the variables that affect the price of one product may vary substantially from those that determine the price of another commodity.
For instance, a declining economy may restrict manufacturing activity owing to a fall in demand for discretionary goods such as automobiles. This will inevitably diminish the demand for crude oil, resulting in a price decrease.
Wheat prices, on the other hand, maybe unaffected, since they are necessities necessary for sustenance. In order to build income in the commodity markets, it is crucial not to place all your expectations on a single group of commodities.
Recognize the cyclical nature of the commodity market.
Generally, all commodities fluctuate in cyclical patterns dictated by the interaction between demand and supply as well as economic and geopolitical considerations.
As a successful investor, you must recognize the phase of the commodity market’s cycle in order to profit from price fluctuations. In addition, as a trader, you play a critical part in driving the cycle and achieving a balance between supply and demand.
There is a growing need.
Increased capital expenditures are made to boost output in order to fulfill the rising demand.
This drives up prices owing to large capital expenditures and an excess of demand over supply.
However, increased costs begin to damper and diminish demand.
The supply gradually surpasses demand, resulting in a decline in commodity prices that increases demand.
To accommodate the decrease in prices, capital expenditures are cut, so reducing the supply and bringing about a state of equilibrium between supply and demand.
Then the procedure begins once again.
Choose a suitable swap
You must choose an exchange with enough liquidity so that commodity futures may be readily purchased and sold without the need to constantly seek buyers or sellers. Additionally, the clearinghouse of the exchange serves as the counterparty for both parties engaged in the deal. This removes any potential credit risk.
In addition, the risk is lessened since all of the top exchanges mandate that holdings in commodity futures be marked to market every day. Consequently, any counterparty risk is minimized when a suitable exchange is chosen.
In addition, you must choose an exchange based on their past performance in commodities. MCX, for instance, is well-known and powerful for non-Agri commodities, but NCDEX is better for farm commodities.
A novice in the commodities market must be well-versed in the fundamentals and operations of the key commodity exchanges.
Control volatility
Volatility is a term you will often hear and connect with commodity trading.
Volatility is the degree to which commodity prices fluctuate or the pace at which prices grow or drop. Commodity volatility is unparalleled and unrelenting. It is comparable to a cyclone in that it may wipe out all of your earnings, but if properly exploited, it can yield enormous riches.
Therefore, in commodity trading, you must recognize that various commodities have varying volatilities. You must determine the pricing range for each product and do business appropriately. The lot sizes must be determined based on the amount of volatility, not the margin needs.
Volatility will influence the risk/return profile of commodities since highly volatile items provide high returns; there is more risk owing to the unpredictability and greater degree of variation in commodity prices.
A novice trader should take larger holdings in commodities with low volatility, such as gold and oil, and smaller stakes in commodities with high volatility, such as copper and agricultural goods.
Beginner traders should adhere to these commodities trading recommendations in order to generate earnings. It is best to trade in a limited number of commodities; after you have gained experience, you may extend your portfolio to include more commodities.
It is crucial to associate with the correct commodities broker, such as Samco, which provides the greatest commodity trading platform in India, in addition to learning the tips and tricks of commodity trading. Samco now provides intraday leverage of up to 100x for commodities futures.
The stock market classes offered by Finlearn Academy are an ideal place to begin one’s study of the market. Everything you need to know about the stock market is available to you right here.