Commodity trading in recent years has gained significant traction and has become an important part of the financial landscape of India. The commodity market offers investors a diverse range of opportunities for investment.The Indian commodity market consists of a complex but definitely thriving ecosystem including both national and international players and various exchanges facilitating the operations of the market. If you are also someone who is looking for suitable investment options in the commodity trading market through MCXPriceWala. this article brings you a complete guide to commodity trading in India including the basic concepts, different types of commodities traded in Mcx and Ncdex and the different strategies you can opt for while trading in the commodity market.
What is Commodity Trading?
If we explain the concept of trade in the commodity market in simple terms, then commodity traders buy or sell raw materials or primary goods used for the production of other goods in a physical or virtual market, commonly known as the commodity market. These products have a wide range of goods including agricultural goods like wheat or coffee to precious metals like silver and gold.
Commodity trading has always been one of the most crucial parts of the Indian economy as it provides the producers of such primary goods opportunities to sell their products at competitive prices and the investors to buy these products at a suitable rate.
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How Does Commodity Trading Work?
Some of the many characteristics of commodity trading that beginners should know are as follows: the main feature of a commodity market is that the demand and supply factors, not any company or government, determine the rates at which goods are sold in the market. The implications of this will be the dependence of prices over fluctuations in production, consumption, as well as the supply available in the market.
Another important characteristic of commodity trading operations is that they are often based on future contracts where the buyers and sellers fix the price of the commodity that will be sold in the future based on the current rates of the commodity prevailing in the market. This helps both the buyers and the sellers protect themselves from market fluctuations and volatility.
Why Is It Important To Know About Commodity Trading Before You Start?
There are various reasons why understanding everything about commodity markets and trading before starting is absolutely necessary for beginners, some of which are given below.
- Commodity trading can be easy for those who have been trading for a while but those who are just starting out can definitely feel overwhelmed by the amount of new things they need to learn.
- Knowing how the market works beforehand will help you assess the risks attached to trading.
- Commodity trading has changed a lot because of the introduction of new technologies.
- Commodity trading can be both complex as well as full of risks as it has gained immense popularity and has evolved into becoming one of the most attractive options for investors who wish to earn profits.
History Of Commodity Markets And Trading
Commodity trading is not a new concept that has been discovered recently. The roots of it date back as far as the ancient civilizations, kingdoms, and clans, the example of which can be the Germans or the Romans. The traders of ancient times would exchange commodities like spices or metals in exchange for other commodities. This system of trade is commonly known as the barter system which was followed by the masses before the innovation of the monetary system.
As the world made new advancements over the years in trade routes as well as technology, commodity trading became an even more complex but equally important part of the economy.
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Evolution Of Commodity Market In India
India is one of the richest countries when it comes to essential commodities that can be sold into the commodity market. The Indian subcontinent is the land where agricultural production covers a range as wide as tea to spices like cinnamon. India also followed the barter system before money was introduced, but the establishment of the infamous Bombay Cotton Trade Association in 1875 laid the foundations of an active commodity trading market.
As years passed, the commodity market expanded to the buying and selling of commodities like edible oilseeds complexes, bullions, raw jute, and many other primary products.
Types Of Commodities That Can Be Traded
The following are the two types of commodities that can be traded in the commodity market.
- Metal Group: Metals that can be used for manufacturing other goods or construction can be traded in the stock market. Examples of such metals include nickel, copper, and aluminium. In addition to these metals, precious metals such as silver, gold, or platinum can also be traded in the commodity market.
- Agriculture: Commodities that fall under the broad head of agriculture products include livestock and crops along with other products related to agriculture like cotton, wheat, or sugar.
- Energy: The last category of commodities that can be traded in the commodity market are energy fuels like natural gas, oils, fossil fuels, ethanol, electricity, as well as coal.
Major Types of Commodity Exchanges in India
Buyers and sellers enter into contracts agreeing to execute a future transaction of trading commodities at pre-fixed rates. These contracts, known as derivative contracts, can be kept by the seller until the execution time or transferred to another party through a sale. MCXCommodity derivative contracts are listed on dedicated exchanges that regulate the trading operations. There are 5 main Indian commodity trading exchanges namely.
- National Stock Exchange
- Bombay Stock Exchange
- Multi Commodity Exchange Of India
- Indian Commodity Exchange
- National Commodity and Derivatives Exchange
How to Trade in Commodity Market
Steps To Follow For Trading In Indian Commodity Markets:
If you are a beginner and wish to know exactly how one trades in the commodity market, the following is a set of a few steps that you may follow in order to trade successfully in the Indian commodity markets.
Step 1:
The first step in the process of commodity trading is to understand exactly how the market operates. Beginners must understand what influences the market rates, the types of commodities that can be traded, and how to indulge in trades.
Step 2:
The second step in the process of commodity trading is to open a trading account in the market on one of the exchanges listed above with the help of a stockbroker.
Step 3:
The third step in the process of commodity trading is the transfer of funds into your trading account. In order to begin trading in the market, you will need to transfer the funds that will make up your initial capital into your trading account. It is advised to use only a small fraction (5% to 10%) of your initial capital until you gain significant experience.
Step 4:
The fourth step in the process of commodity trading is the formulation of a trading plan. Before you start trading in the commodity market, it is necessary for you to formulate a detailed trading plan that aligns with your financial goals as well as your risk tolerance.
Step 5:
The fifth and last step in the process of commodity trading is the execution of the formulated plan. Once you have a plan in your mind that aligns with all your goals, you can start trading in the commodity markets. It is necessary for traders to keep a close eye on the fluctuations in the market and protect their capital.
Strategies for Commodity Trading In India
The following are the three main strategies that can be followed by the traders when starting out the operations in the commodity market.
- Trend Following: This strategy as the name suggests depends on the trends of the market. It requires traders to determine the current trends in the prices of the commodities and trade with the flow of the trends. Various technical indicators, such as trendiness and moving averages, assess the trends.
- Breakout Trading: This strategy of commodity trading requires the traders to find a position on which the price of the commodity breaks below or above the resistance level or the significant support, matching the breakout direction.
- Seasonal Trading: This strategy as the name suggests requires traders to identify the expected fluctuations in the price of the agricultural commodities due to seasonality by analysing the seasonal patterns and the data related to the past seasonal prices. The trader can then take a position in the market depending on their analysis.
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Conclusion
Commodity trading in the Indian markets is one of the easiest ways to earn profits by short-term price movements. Steady and effective planning can definitely help investors go a very long way. Hence, it is a must for beginners to understand all the important aspects of commodity trading mentioned in this article before starting their trading journey.