The oldest type of financial instrument is the commodity. The market for commodities is nearly as old as human civilization itself. Rice may have been the first commodity around 6,000 years ago, according to historical data.
Clay tokens were used as a sort of money to purchase livestock during the Sumerian culture (4,500 BC).
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What is Commodity Trading?
The oldest type of financial instrument is the commodity. The market for commodities is nearly as old as human civilization itself. Rice may have been the first commodity around 6,000 years ago, according to historical data. Clay tokens were used as a sort of money to purchase livestock during the Sumerian culture (4,500 BC). Commodity trading is the foundation of today's global trade environment. With the introduction of internet commodity trading, private traders were able to obtain access to global commodity markets with relatively small sums of money. Commodities have become a popular way to hedge against inflation and diversify one's portfolio. Commodity trading is a favored method for many traders and investors to secure their cash and reduce overall risk in their portfolios.
Benefits of trading in commodities
Commodities are traded for a variety of reasons:
Due to the lack of a direct correlation between commodities and other asset classes, including commodities in an equity-only portfolio can reduce volatility.
Heaven of safety
Because commodities may keep their physical worth in times of global economic uncertainty and market instability, they can act as a safe haven.
Hedging against inflation
The intrinsic worth of commodities is unaffected by currency fluctuations. Even though a currency loses in value during a period of inflation, they will typically keep their value.
Speculation on the price of commodities
Commodities can be extremely volatile, with large price movements. One approach to profit from substantial price changes is to trade commodities CFDs.
Due to the market’s occasional extreme volatility and a large range of accessible instruments, from derivatives such as futures and CFDs to commodity-producing businesses’ stocks, commodity trading demands careful analysis.
When it comes to commodities, the chance of generating significant profits comes with the risk of incurring large loses. Commodity prices can be difficult to forecast. Several circumstances, such as weather, political turmoil, and labor strikes, can cause the price to fluctuate dramatically. There are essentially no fundamental financial measures, such as price/earnings ratios, interest rates, and so on, in contrast to equities.
How to trade commodities
CFDs are one of the simplest and most popular ways to trade commodities. A contract for difference (CFD) is a sort of agreement between a trader and a broker in which the trader tries to profit from the difference in price between opening and completing the deal.
Investing in commodity CFDs eliminates the cost of commodity storage in the event of physical delivery. Trading commodities with CFDs allows you to go long or short without having to deal with traditional commodities exchanges such as CME, ICE, or NYMEX.
CFDs also allow you the option of trading commodities in both directions. You can try to profit from either upward or downward future price movements, regardless of whether your commodity price estimate is positive or negative.
Furthermore, commodity trading using CFDs is frequently commission-free, with brokers profiting from the spread – and traders profiting from the overall price change.
Another advantage is that CFDs are leveraged products. WOLFCFD, for example, offers a 10% margin (the number varies based on the commodity and the CFD broker), which means you only need to deposit 10% of the total value of the trade you wish to open. Your CFD provider will cover the rest. In this scenario, if you wish to open a transaction for $1,000 worth of a certain commodities CFD and your broker demands a 10% margin, you should just invest $100 to open the deal.
Similar to stock trading, where you buy and sell shares of corporations, commodity trading allows you to buy and sell commodities. Commodities are exchanged on specific exchanges, and traders purchase and sell them in order to profit from fluctuations in the commodity market. Contracts For Difference (CFDs), one of the most straightforward trading alternatives in commodities, can make commodity trading easier for beginners. CFDs are essentially financial tools that allow you to profit from price changes without taking ownership of the underlying securities.
the step-by-step approach on how to trade Commodities in India. Here are a few essential points to remember from this article:
Hedgers and speculators both engage in commodity trading.
Investors and traders use it as one of the most common methods of portfolio diversification.
Because the amount of margin required to trade is slightly higher, transactions must be placed only after a thorough examination of the technical and fundamental picture.
When trading commodities, we can do both intraday (MIS) and NRML (delivery-based trading).
For all trades, effective risk management (stop loss and target) is always recommended.
How we can earn profit from commodities
- Trail your stop loss to Break-even point (BEP)as soon as the price goes in your favor. This may not ensure that you always make profits because the price can easily oscillate around your entry price and hit your trailing stop-loss before moving further in your direction. But as downside protection, it definitely works.
- Don’t average your winning trades at reversal points. Your average entry price will work against your favor and will force you to sell in a loss. It’s better to book profits and then wait for a re-entry especially if you’re trading in a range-bound market.
- Trade smaller contracts. If your account size is small, switch to mini contracts instead of trading the standard contracts. For instance, if you have ₹1,00,000 in your trading account, it is better to trade 15–20 lots of Crude Oil Mini futures (10 Barrels per lot) rather than 2 lots of the large Crude Oil futures contracts (100 Barrels per lot). Why? Because you can scale in and out of trades and maneuver much more efficiently. You will feel less like a victim if the trade goes against you as you can enter and exit in smaller pieces.
- Buy options as a stop loss/trailing stop loss once the trade goes in your favor/against you. For instance, let’s assume you bought Crude Oil October futures at 5200 and it is now trading at 5500 (300 rupees profit per barrel = ₹30,000 per lot). In order to protect your profits, you buy an At the Money (ATM)put option at ₹100 (Total cost = ₹10,000 but you get unlimited upside potential if crude rises more).
- Book your profits more often! Although people say you should run your profits, it’s not always true. More often than not, you should try and increase your hit rate and book small to medium profits in a volatile commodity. This will help you build your account size so that you can take more risks without losing your capital.
- Track inventories but don’t trade them. Inventory numbers in crude oil and natural gas can be very unpredictable. It almost always causes an immediate price spike which is not rational to trade for those sitting in India with little to no knowledge about the demand/supply situation. When you take blind trades, you are more likely to lose than win. Just remember that.
- Remember to never take trade against the currency trend. For example, if the rupee is depreciating, it automatically means that the price of commodities will be higher in rupee terms. At such times, it doesn’t make any sense to go short on any commodities.
- Don’t bet against regulatory possibilities. For example, there is no point in going short on gold & silver in the current scenario even if the international prices go down because the Indian currency is depreciating and the central government may impose additional import duties which will hike the price of gold and possibly cause a short-squeeze.
- Have a daily stop-loss limit which you will not exceed no matter what! If you lose a certain amount, then don’t try to recover that same day because you are going to be very emotional and will most likely indulge in revenge trading. Those who go down this path are sure to blow up their account sooner or later.
- Trade commodities which are not correlated or are less correlated. For example, rather than trading gold & silver at the same time, you could trade crude and gold or some other combination like Agri/base metals. If you get the direction wrong on a commodity that doesn’t mean it will necessarily result in a loss in the other. It’s a type of risk diversification.
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