5 Golden Tips For Successful Commodity Market Trading | Espresso

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.

Published on 05 July 2022

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.

To Conclude

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.

Chandresh Khona
Team Espresso

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