5 Important Commodity Trading Tips
Commodity trading is quite different from other forms of trading. It refers to buying and selling of various commodities and their derivatives in the commodity markets. A commodity is a raw material that can be used for industrial purposes, such as oil, natural gas, wheat, rice, rubber, copper, aluminium, gold, silver, etc.
Commodity trading can be done on commodity exchanges. And trading in commodities allows you to diversify your investment portfolio and earn high returns on your investments. However, it’s crucial to note that commodity prices are far more volatile than equities, and hence, you need to be very diligent and careful while trading in them.
Also, the variations in commodity prices depend upon a lot of national and international factors. These may include fluctuations in demand and supply, currency variations, geopolitical developments, etc. To help you out, we have listed a few important commodity trading tips in this article.
Commodity Trading Tips that Will Help You
Here are some commodity trading tips that will help you:
- Never forget to diversify
Diversifying is the golden rule for any type of trading, and commodity trading is no exception. You need to understand that commodity markets are highly volatile, and despite numerous forecasts, analyses, and research, you can never be sure of your predictions. Being a smart trader, you should not worry about making losses, but you should try to mitigate them by diversifying your portfolio.
Different factors are responsible for determining the prices of different commodities. For example, a decline in the economy may reduce the demand for discretionary items, such as cars, alcohol, etc., but the demand for essential commodities, such as wheat, rice, oil, etc., never dies down. So, you can offset your losses in one commodity by diversifying your portfolio in multiple commodities.
- Try to understand the trend
While trading in commodities, you need to make the trend your best friend. Usually, commodity markets are cyclical. It means that commodity prices tend to follow patterns that are in large cycles or sub-cycles. And there will be volatility in between these cycles. You need to understand the cyclical nature of commodity markets and try to trade as per the trend.
As a successful commodity trader, you need to spot the trend in the commodity markets and the time when prevailing trends change. The contrarian approach to investing works well in the equity markets but may not prove to be beneficial in the commodity markets.
- Maintain strict stop losses
Although maintaining stop losses is recommended for any kind of trading, its significance increases even more in the case of commodity trading. It’s because for two reasons – Firstly, commodity trading involves highly leveraged positions on low margins, and therefore, stop losses are necessary to avoid very high losses.
Secondly, maintaining stop losses ensures that you do not overexpose yourself to any specific commodity. This will decrease your overall risks. In market terms, this phenomenon is said to be avoiding the temptation of averaging your losers.
- Select the best broker
One thing that matters a lot in every type of trading is the broker. It plays a prominent role in determining how much loss or profit you make. For instance, if your broker’s platform is slow, you might lose some crucial seconds while trading in commodities, and this might decrease your profits or increase your losses.
- Keep track of the market
It’s very crucial to keep track of the market in which you are trading. This will help you know which commodity to invest in, the right time to enter or exit your trade, and what is the prevailing trend in the market. There are so many commodity exchanges working simultaneously in different parts of the world. Hence, tracking all of them may not be possible. The best you can do is track the commodity exchanges in which you want to trade.
Commodity trading is lucrative but highly risky as well. So, you need to get your fundamentals right and be diligent while trying to trade. You need to understand the commodity market thoroughly before starting. The commodity market tips mentioned above can help you to conduct your trade smartly.
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Frequently Asked Questions
You can trade in commodities by placing buying and selling orders at the commodity exchanges. There are several commodity exchanges in India, including MCX, NCDEX, ICEX, NSE, and BSE. You can trade on these exchanges online through a commodity trading account with a broker.
To open your commodity trading account, you need to approach a broker and fill up an account opening form. You can then submit the relevant documents and wait for the verification process to start commodity trading. After that, you can open a commodity trading account online or offline.
Benefits of commodity trading include diversification, protection from inflation, and hedging against event risks. Commodity trading also allows you to make use of market fluctuations and gain high returns on your investments.