Basics of Commodity Trading : Best Tips For Trading Commodity 101
Basics of commodity trading and terminology are essential before venturing into the world of commodity trading. Commodity trading has evolved over the last 100 years, and there has never been a better time to discuss commodity trading than now. When the global economy is facing enormous challenges as a result of inflation, commodities are becoming an increasingly popular trading asset in these times.
Table of Contents
- What is commodity trading?
- How to trade commodities online?
- Trading Commodities vs. Trading Stocks
- How to make money in commodity trading?
- Basic Terms Of Commodity Trading :-
Commodity markets have been affected by overlapping crises over the last two years. COVID-19 emphasized the volatility of these markets: global shocks can cause sharp and sudden increases or decreases in prices. Trading is all about such possibilities, and when you have the flexibility to go on both sides of the trade, you may make a lot of money.
This blog will teach you the basics of commodity trading, how to trade commodities, and how much money you can make trading commodities.
What is commodity trading?
Commodity trading simply means buying or selling commodities in either spot or derivative markets. Spot markets are where you can buy any commodity on the spot and take physical delivery of the product, whereas derivative markets are where you speculate on the price and buy or sell a future contract instead of the asset itself.
Commodities can be traded in both spot and derivative markets. Derivatives, however, are more popular and used for speculation, hedging, and arbitrage.
Derivative markets, also known as secondary markets, are managed by various commodity exchanges.
Commodity exchanges in the United States and India-
United States – Chicago Mercantile Exchange ( CME), New York Mercantile Exchange (NYMEX).
India – Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX)
How to trade commodities online?
All you need to trade commodities online is a Demat account with commodities segment availability. Listed commodity brokers with commodity exchanges can help you with that. You can begin trading commodities once your account is ready.
When you begin commodity trading online, you have a wide range of commodities to choose from. The available options may differ depending on your exchange; the list below is an example of all commodities traded on the MCX exchange:-
Find a suitable futures or option contract with an expiry date in the current or next month to place the order –
You can choose the number of lots based on your position size management and the margin available to trade; for example, if you want to buy 1 lot of cotton, the required margin is shown below (this facility may not be available for all brokers; consult your broker’s margin calculator for more information).
Once you have entered the correct lot size, you can begin trading and place a stop loss order to manage your risk.
Trading Commodities vs. Trading Stocks
What sets commodities apart from trading prospects?
Is commodity trading more profitable?
Is commodity trading riskier than stock trading?
You need to understand the distinctions between commodity trading and stock trading in order to find the answers to all of these questions. That’s exactly what we are going to do now.
|Leverage||Commodities are more leveraged than equities, which may be advantageous if you understand how to use leverage in your trade to generate more earnings with lower margins.|
|Manipulation||Commodity markets are less prone to manipulation; everyone knows how huge market operators influence stocks; such manipulations are not conceivable in commodities because commodities rely on worldwide supply and demand; it is difficult to manipulate a commodity on a global scale.|
|Volatility||Commodity markets are more volatile than stock markets; if you enjoy playing in turbulent environments, commodities trading is for you.|
|Trends||As previously said, commodity prices are driven by global supply and demand; hence, trends in commodity markets are frequently observed to be longer and more lasting than trends in stock markets.|
|Risk||Commodities have a larger reward potential, but there is a risk-reward trade-off. Volatility and leverage are two risk variables that can make commodity trading more dangerous.|
How to make money in commodity trading?
If you have adequate fundamental commodity trading skills, commodity trading can be a profitable business venture that can make you a lot more money. The good news is that you don’t need any special commodity trading skills to earn money. If you know how to trade, you can apply your setup and experience from stock, forex, or any type of trading.
You can make money in commodity trading by both going long as well as going short we will understand this by an example of silver mini contract-
Going long for 10 silver mini futures when silver prices are in an uptrend, as shown in the image by the green arrow Future contracts during this period would result in a profit of –
Buy Price = 61916
Sell Price = 69176
Net Profit = 72,429 /- ( After deduction of brokerage , STT and other taxes)
Now that prices have begun to fall, one can take advantage of the falling silver mic prices by going short, as shown by the red arrow. If you had gone short for ten futures contracts, your profit from this trade would have been-
Short average = 68403
Buy average = 59125
Net Profit = 92,611 /-
Net Profit from both positions = 1,65,040 /- (72429 + 92611)
[Pro Tip : Use P&L calculator to find calculation and taxes involved]
This is just a glimpse of how commodity trading can help ride long trends and with small margin you can earn very good amounts of profit. Like in the above example, only 10 lots have been put in use, which needed a margin amount of just around sixty thousand only.
Basic Terms Of Commodity Trading :-
The basics of commodity trading terminology used are explained below:
The price difference between future and spot price of a commodity.
A defined quantity of a commodity of consistent grade; the standard trading unit in the futures market.
Cash or equivalent placed as a guarantee of futures contract fulfillment (not a part payment or purchase).
Open interest :-
The quantity of “open contracts.” It always refers to unliquidated purchases or transactions, never to their total.
The actual physical commodity
The price at which the spot or cash commodity is selling.
Expiration date of a future or an option contract.
Future or option contract having no liquidity or low liquidity ( very less or no buyers and sellers)
Lowest permissible price of the day after which trading halts by exchange for a particular commodity.
Highest permissible price of the day after which trading halts for that particular commodity.
How much you can make in intraday commodity trading?
Intraday commodity trading can be challenging, but when done correctly, it can yield very high returns. Intraday trading may provide 2-3% returns on capital. However, trading intraday does not require you to trade every day. Instead, choose your setup and trade appropriately.
How much you can make in swing commodity trading?
Swing trading is regarded good for commodity markets due to steady and extended trends, and expert commodity traders may profit up to 100% or more on certain periods of trending markets.
How much capital is required for commodity trading?
One can start trading one or two mini future lots of gold and silver with as small as ten thousand rupees but for some contracts like crude oil and cotton margin required might go over 1 lakh easily however if someone wants to trade in options margin required is very less ( few thousand rupees).
Is commodity trading profitable?
Commodity trading is not just profitable but also a great way to diversify your trading portfolio, market moves always in cycle and so does the equity curve always trade in non corelated markets to ensure good profits.
[Suggested Reading : Crude Oil Trading- How To Trade Crude Oil?]