Commodity trading tips are nowadays highly valued as commodity trading has suddenly become a hot topic. This is partly due to the rise in commodity prices because of the COVID-related government expenditure and the supply constraints due to the war in Ukraine. Moreover, trading in options in the commodity market has also been recently allowed by SEBI. Commodity trading is also becoming more popular due to improvement and standardisation of trading, storage and transport infrastructure. People want to know more about exchanges like MCX and want their brokers to give MCX tips.
However, before you take this opportunity to invest in the commodity market, go through the following commodity tips that you will need to make the right trades:
Study the commodity market cycles
Commodity demand and supply often follow temporal patterns. For example certain crops increase in supply (and thus see fall in price) during certain seasons or under certain climatic conditions. Similarly, consumption demand for fossil fuels see an increase during winter/summer for heating/cooling as per region. Sometimes when markets become unstable due to recession or geopolitical instability, demand for safe havens like gold increases. It is important to understand these recurring market trends in order to identify them beforehand and invest accordingly. Understanding of long-term cycles can help you overcome the uncertainties of short term sub-cycles.
Follow geo-economic news to tackle black swan events
A black swan event is an event (usually tragic) that few expected. However, a person following the economic news holistically can often predict a black swan event or at least predict the subsequent events once the black swan event has happened already. Unlike stock trading where stocks follow a set pattern governed by a set of variables, commodity prices involve too many variables related to micro and macroeconomic trends. Therefore, although it is important to have a strategy it should also be flexible to account for unknown variables.
Understand different volatility levels of different commodities
Certain commodities show only minor volatility across seasons unless there is some unexpected event. Commodities like gold fall in this category. Other commodities like food and oil show higher volatility in general. Volatility can affect margin requirements as well as lot sizes. It is advisable to start trading in commodities with less volatile prices, learn the basic trends and concepts and only then take risks in more volatile markets. However, the individual trader’s risk appetite and domain knowledge also matters in such cases.
Understand the risks of high leverage
Commodity markets usually have much higher leverage (ie. require low margin requirements) than stock markets. Leverage here can reach around 15 times the investment. This allows high returns using low initial investment. However, high leverage also means that possible losses are also higher for the same level of investment.
Use stop loss orders and avoid overtrading
Due to high leverage and high volatility in certain commodities, it is advisable to use stop loss in order to minimise losses. It is important to know when to fold your cards from a trade and not end up losing more by overtrading.
Keep a track of major production indices
Indices like Nifty Commodities Index or even something basic like Index of Industrial Production, alongside inflation indices can help traders keep track of macroeconomic trends that affect the commodity market.
Understand the importance of diversification
It is important to spread out the risk by diversifying your commodities portfolio. While diversifying, remember to look at the direct or inverse relationship that the prices of two or more commodities have with each other eg: if fuel prices increase, it may be a signal for a general increase in prices of all commodities.
Keep track of legislation and public policy
Laws regarding certain commodities, especially liberalisation of the market for that commodity can help you predict an increase in price of that commodity. Like stock markets, commodity markets too are affected by laws on production, international trade and tariffs, subsidies etc. To know more about commodity markets and its regulation in India click here.
Prepare for the possibility of the receival of goods
In the stock market, if a trader fails to sell off an asset, he simply has to hold the stock in electronic form for as long as liquidity remains low. However, in the commodity market if the owner of a commodity fails to sell it off in time, he may have to take possession of the physical asset (which may be tonnes of wheat or barrels of oil) and store them safely for future sale. However, such unfortunate incidents are avoidable through arbitrage.
Select a good broker
the aforementioned analysis of current events and detailed strategy is hard to arrive at for a beginner. Therefore, in order to execute trades smoothly with the best possible market intelligence available at your fingertips, choose a reliable broker with proven experience in market analysis like Angel One. Before choosing the broker, check the amount charged for brokerage, services offered, ease and speed of execution of trade and compare accordingly. Angel One offers zero brokerage for a range of services that you can check out.
Now that you know these tips on commodity trading you can open a demat account with the Angel One app and check out the inner workings of the commodity market.