Commodity Trading Basic –
In this Topic, we are going to learn about Commodity Trading Basic. Every day, people engage in activities that involve the use of products. The raw materials that go into creating these products are called commodities. A commodity is a raw material or primary agricultural product that can be bought and sold, for instance, copper or coffee.
Have you wondered about these questions like if the gold prices would go up? Or the barley crop this year has been good and then the prices are likely to fall? If you think these predictions have a good chance of coming true and you are keen on putting money it, you could try your hand at commodity trading Online.
Commodity trading Basic is an investment strategy that includes the buying and selling of goods called commodities. A commodities derivative is where people just speculate on the trend of the price of commodities to generate profit if the price moves in their favor.
The most commonly traded derivative in commodities is a futures contract. For instance, if you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price and it also does not necessarily mean that you would buy the huge bulk of physical commodity because the contract would end before its expiry date.
Now we will see How to Start Commodities Trading Online
Commodities and Exchanges
- Commodities and several other derivative products are traded primarily on the exchanges such as the Chicago Board of Trading (CBOT), London Metal Exchange (LME), Multi Commodity Exchange of India Limited (MCX) and many other such exchanges.
- Maximum commodity markets across the world trade in agricultural products and other raw materials like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc. and contracts centered on them.
- These commodity trading online exchanges are standardized in nature and decently regulated.
- An exchange plays the role of an intermediary to all commodity dealings and takes initial margin from both sides of the trade to act as a guarantee.
The good side and the bad side of Commodity Trading Types
Over the years commodity trading Basic is gaining popularity because of the various benefits it offers. Commodity futures are universally accepted to be a part of every successful and diversified investment portfolio. Apart from that commodity provides liquidity; require a small investment, gives quick profits and hedging options which make it attractive to investors.
Let’s now look at the dark side of it. Well, trading in commodities has been considered as something just for the experts. Many traders have lost money and hence regard it as a risky venture. The risk factors such as variability in the prices of commodities, the volatile nature of quantity of output that can be obtained after the production process, no guarantee if an investment will make a profit, and various other factors such as weather, foreign exchange rates, national monetary policies, inflation etc. related with the commodity trading basic may affect the returns.
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How Do Commodity Trading Online works?
It all starts when you buy a futures contract of any of the commodity being traded on the exchange. Here you do not pay the entire amount of the commodity but only the fixed percentage of the cost, which is known as the margin.
Let’s take a commodity trading Basic example you purchase a Gold Futures contract. The minimum contract size for a gold future is 100 grams we assume that it may be worth $5000. The margin for gold is said 3%. So actually you would pay $150, which means you would pay a small amount to buy a large amount of gold.
You could sell this contract any time before the expiry of it. The expiry could be after one month, two months and so on. Only if you sell the of course contract before it expires, you don’t have to worry about really buying the gold.
If the gold price rises to say $ 6000 per 100 grams, $1000 will be credited to your account. But if the price reduces to $4000, $1000 would be debited from your account.
As stock prices are quoted on a daily basis in the stock markets in the same manner the commodity futures prices are quoted on the commodity trading basic exchanges.
Pre-requisites of Commodity Trading Types
- At times it is the small specifics that make the big difference in investment performance. Familiarity with various order types and how to properly place each of them is crucial to being a successful trader. Irrespective of whether you trade online or through a broker, knowing the type of order and placing it accurately is vital.
- Commodities have been allotted respective lot sizes to avoid any confusion in trading by standardizing the sizes of the commodities to trade. The profit or loss you make is ascertained on the number of lots you have. You can buy or sell any number of lots depending upon your risk appetite and margin you have with your broker.
- You will have to find a commodities broker but that is not a big problem. There are many brokers that offer commodity trading Tips these days. Brokerage fee is also low for commodity futures.
Commodity Trading tips
- Traders and brokers are highly distinctive when it comes to commodity trading strategies. They should follow and trade with the trends, rather than attempting to pick tops and bottoms.
- Money management techniques need to be applied to trading.
- Define your commodity trading Basic limits and do not over trade.
- Decide on your profit goal and only then take a position. Also, be sure when to get out if the market goes against you.
- Don’t try to trade many markets with small capital.
- Determine the correct mix of contracts and avoid trading only the volatile contracts.
- Make a habit to establish trading plans before the market opens which can help in eliminating any emotional reactions. Define your entry points, exit points.
- Once a position is established for the trades do not get out unless the stop is reached. Plan everything from which position you will get in the market, how much you will risk on the trade, and where you will take your profits.
- Use discipline to remove impulse trading.
- Train your mind to accept many small losses and for large gains.
- Don’t trade on rumors.
- Analyze your losses. Learn from them. They’re costly lessons; you paid for them.
- Always use stop orders.
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Vaishali Gaur says
Futures contracts perform two important functions like price discovery and hedging of price risk in a commodity. In international bourses traders can also use financial instruments like call and put options. Futures contracts are useful for the producer because he can get an idea of the price likely to prevail at a future point of time. They enable consumers cover purchases by making forward contracts