Apart from stocks and forex, an increasing number of new investors are also interested in trading commodities. If you too are interested in commodity trading, these are some tips that can help you begin.
Multi Commodity Exchange and National Commodity and Derivatives Exchange are two of the most popular commodity trading exchanges in India. While Multi Commodity Exchange is more popular for base and precious metals, the National Commodity and Derivatives Exchange is well-known for its agri-based products.
The rising popularity of stock and forex trading has also made commodity trading very popular in India. But as a new investor or trader, it is essential first to understand the basics of this market to protect yourself against any significant losses.
To help you begin, we’ve created a list of 5 valuable tips-
1. Basics of the Futures Contract
If you’ve never traded in the F&O segment of the stock market, you might find the future contracts of the commodity market a little challenging to understand. Trading on National Commodity and Derivatives Exchange is done in the futures market and spot market. Spot trading is similar to buying/selling stocks where trades take place immediately.
On the other hand, futures involve standardised contracts where you may or may not accept the delivery of the commodity. It is an agreement where you agree to buy or sell a commodity at a pre-determined price in the future.
2. Number of Commodities Traded
The National Commodity and Derivatives Exchange currently offers trading across 34 commodities, the majority of which are agri-based products. Soybean, Cereals, Chana, Guar seed, Castor, Oil and Oil Seeds, Spices, and Barley, are some of the most popular offerings at the exchange.
Apart from agri-products, it also offers trading in many precious metals, polymer, and energy. However, the volume for these commodities on National Commodity and Derivatives Exchange is considerably lower than Multi Commodity Exchange.
3. Logistics of the Market
A common mistake among most of the new commodity traders is to start trading commodities without first understanding the logistics of this market which varies from the stock market. While stock markets are mostly affected by the national news, the commodity market is a global market and news from any part of the world can result in major upwards or downwards movement.
Incorporating such news in your trades, knowing the best time frames to trade, and reading charts are some of the most important things to know before you start trading.
4. Understanding Cyclic and Non-Cyclic Commodities
Commodities can be divided into two categories: cyclic and non-cyclic. Cyclic commodities are the ones that are natural and highly dependent on the economy. Their costs start rising when the supply falls.
On the other hand, non-cyclic commodities depend on the industries, and their prices increase when their demand increases. Having adequate knowledge about the type of commodity you are trading is essential to initiate profitable trades.
5. Commodity-specific Trading
All the different types of commodities have their features and sensitivities. For instance, the price of agri-based commodities on NCDEX is highly sensitive to their demand and supply. Similarly, if you’re trading oil, inflation is something that you should consider before placing a trade.
If you want to trade precious metals, international currencies become an essential determinant. In short, a trader should understand the features and sensitivities of the commodity they are trading to avoid being on the wrong side of the trade.
In the long run, it is your experience and knowledge of the commodities market that would help you create useful trading strategies. But if you are just starting with commodity trading, these are some tips that would ensure that you begin in a safe and knowledgeable manner.