What is commodity trading? All you should know

When you think of stock markets, what comes to your mind immediately? It is usually trading in stocks. But did you know trading in stock markets also includes forex trading and commodity trading? Yes, that is right. We have covered many concepts relating to stock trading and also covered the basics of forex trading in our previous blogs. Let us now cover commodity trading and its core details to help traders learn the ropes of commodity trading. Read More: What is forex trading? - All you need to know 

What are the basics of commodity trading?

Commodity trading is the buying and selling of raw materials or primary products, such as metals, agricultural goods, energy resources, and more. It's a financial market where traders can speculate on the price movements of these essential goods. It is an opportunity for traders to participate in a wide range of commodities, from gold and crude oil to spices and agricultural produce. The basic idea is to profit from price fluctuations by purchasing low and selling high, or even making money when prices fall by selling high and buying back at a lower price. Commodity trading can be done in the spot market or the derivative market through the F&O segment or through forward contracts. 

Where can you trade in commodities?

Commodity trading can be done through commodity exchanges, which are dedicated platforms for buying and selling various commodities. The two main commodity exchanges in India are MCX (Multi Commodity Exchange) and NCDEX (National Commodity & Derivatives Exchange).  The four main exchanges for commodity trading in India and their details are mentioned below.

• Multi Commodity Exchange (MCX)
• National Commodity & Derivatives Exchange (NCDEX)
• Indian Commodity Exchange (ICEX)
• National Multi Commodity Exchange (NMCE)

While the trading hours for each commodity exchange can vary, they typically operate in two sessions with the following timings: Morning Session - 9:00 AM to 5:00 PM Evening Session - 5:00 PM to 11:30 PM These trading sessions provide traders with opportunities to buy and sell commodities within specific timeframes during the trading day. Traders need to understand the rules laid down by these exchanges for effective trading in commodities and the key nuances in order to create a successful trading portfolio. 

How to trade in commodities?

The steps to do commodity trading can be explained hereunder. 

• Choose the specific commodity you want to trade, such as gold, silver, crude oil, agricultural products, or others.
• Find a reputable brokerage firm that offers commodity trading services.
• Open a trading account with the chosen brokerage.
• Conduct thorough research on the target commodity to trade.
• Understand supply and demand factors, seasonal patterns, and global influences on its price.
• Create a well-structured trading plan that includes,
  • Entry and exit strategies
  • Risk management techniques
  • Setting stop-loss orders
• Deposit the required amount of capital for trading into the trading account.
• Log in to the trading account with the brokerage.
• Place buy or sell orders for the chosen commodity based on the trading plan.
• Decide whether to trade in futures contracts, options, or other contract types available for the chosen commodity.
• Stay informed about market news and developments that could affect the commodity's price.
• Regularly analyse market trends and conditions.
• Execute the trades as per the trading plan, ensuring traders stick to their predetermined strategies.
• Maintain a record of all the trades, including entry and exit prices, trade sizes, and results.
• Continuously be educated about the commodity market and adapt the trading strategies as needed.

What are the common commodity trading strategies?

Some of the common commodity trading strategies often used by traders not only in India but also across the world are highlighted below.

Trend Following

• Trend following strategies involve identifying and following established price trends. Traders analyse historical price data to determine whether a commodity is in an uptrend or downtrend.
• They buy during uptrends (long positions) and sell during downtrends (short positions) to capitalise on the momentum.

Range Trading

• Range trading is used when a commodity's price remains within a specific range or boundary. Traders buy at the bottom of the range and sell at the top.
• This strategy takes advantage of price oscillations but requires patience and discipline.

Breakout Trading

• Breakout traders focus on price levels where a commodity is about to break out of a range. They buy when the price surpasses a resistance level or sell when it falls below a support level.
• This strategy aims to profit from significant price movements following a breakout.

Fundamental Analysis

• Fundamental analysis involves studying the underlying factors that affect a commodity's supply and demand, such as economic indicators, weather conditions, geopolitical events, and government policies.
• Traders use this information to make informed trading decisions based on the commodity's fundamental value.

Technical Analysis

• Technical analysis involves studying historical price charts and using technical indicators like moving averages, RSI, and MACD to make trading decisions.
• Traders identify chart patterns and use these indicators to predict future price movements.

Seasonal Trading

• Seasonal trading strategies are based on the historical price patterns of commodities during specific times of the year.
• Traders anticipate price movements that recur seasonally, like agricultural products affected by planting and harvest seasons.

Conclusion

Commodity trading is a popular form of trading along with equity trading and currency trading. However, commodity trading is often considered riskier than equity trading due to the multitude of factors affecting the prices of commodities across the globe. Therefore, traders need to understand the nuances of commodity trading like the factors influencing the prices and the volumes of commodities being traded and the effect of macroeconomic factors on their prices.  We hope this blog was able to provide you with the basics of commodity trading to help you start your trading journey and build a successful trading portfolio.