Commodities are the physical goods or more commercially speaking – basic goods or raw materials. These commodities are being traded by individuals or institutions for more complex goods and services. The trading should take place in a situation when two equivalent units of a commodity have uniform prices anywhere in the world. Generally, commodities are being produced and traded in large scale to support liquid and efficient global trading market. The market provides transparent pool to transact business for commodity producers, consumers and financial traders. Some examples of commodities that are being traded are – wheat, corn, oil, etc.
Main Components Of Commodity Trading
Commodities for trading can be divided into four significant categories. To know more about the commodity trading in India you must know about these categories.
● Agricultural Commodities – Agricultural commodities include food (corn, wheat, soyabean, etc.) and non-food crops (cotton, lumber, rubber, etc.) and livestock (cattle, hogs, pork bellies, etc.).
● Metals – Precious metals (gold, silver, platinum, etc.) and base metals (aluminium, zinc, copper, etc.) are the best form for commodity trading in this respect.
● Energy Resources – Petroleum products like gasoline, crude oil, natural gas, coal, uranium are being traded. Also, ethanol, electricity and many more come under the category type.
● Environmental Products – Products such as carbon emissions, renewable energy certificates and white certificates are being traded as commodities.
● Cryptocurrencies – Bitcoins, Ripple, Ethereum, etc. are some form of cryptocurrencies that are considered as the commodities for trading.
Facts & Tips Of Trading Through Commodity Exchange
As a trader you might want to know the difference between trading in equities and commodities. As an asset category, equity might be slightly different. But, if you want to compare between commodity futures and options with stock futures and options, they are more or less same.
At a technical level, there are two basic differences. Firstly, the underlying entity of stock options is the stock itself. Whereas, the underlying entity in case of commodity options is the commodity future. Secondly, in case of commodity trading, traders can opt for delivery or for square-up. In the case of equity F&O, all transactions are settled in cash only.
Let us look at the seven ideas and tips for trading through commodity exchanges.
● With commodity futures, the equity margins are lower as price volatility is relatively lower. In case of commodities, leverage levels are higher, i.e., about 14-16x. Hence, use it judiciously.
● Make the best of cover orders and bracket orders while trading. Draw boundaries for your orders to use your commodity leverage judiciously in the best way possible. This will reduce your risk and enhance leverage as well.
● Trading in commodities is trading with the trend. The trend can be of long term and short term (news reactions). In case of equities a contrarian approach might work well but in commodity trading the scenario is not the same. Demand and supply trends matter a lot in this case.
● Averaging is never a great idea with commodity trading. You might have bought gold or silver at higher prices and you are tempted to buy more at lower levels. What can probably go wrong with gold? But, you run two risks at a time. First, overexposing to a particular commodity trend. Second, committing the same mistake twice. Rather, take a fresh view in such cases.
● Aggressive traders have the temptation to over trade and try to recover their losses. Over trading leads in incurring more transaction costs and get hit both ways badly. It is always advisable to stick with the trading plan and focus on trade profitability.
● Don’t risk your positions being squared up forcibly. Your broker might make a margin call when your existing positional risk cannot be supported by the same. It is asked to infuse more money. Being a trader, you should avoid that by keeping your trades within limits.
● Don’t risk your positions being squared up forcibly. Your broker might make a margin call when your existing positional risk cannot be supported by the same. It is asked to infuse more money. Being a trader, you should avoid that by keeping your trades within limits