Commodity trading is quite popular among traders in India. However, commodity trading is a little trickier than equity training because its price fluctuations depend on a number of factors and hence, more volatile in nature.
If you are planning to test the waters, here are useful commodity trading tips.
Know the Basics
You should familiarize yourself with the fundamental knowledge of commodity trading. For instance:
- Different categories in commodity market – agricultural products, metals, energy products, livestock, and meat.
- Major commodity trading exchanges such as Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX), Ace Derivatives Exchange (ACE) and Universal Commodity Exchange (UCX).
- Commodity trading terminology such as soft/hard commodities, cyclical/non-cyclical commodities, average trading price, etc.
Understand Price Mechanisms
The prices of commodities are governed by demand-supply factors, currency variations, global prices, inflation, weather, government strategy, socio-economic trends, and many other factors. Each category and each product within the category have unique features and dynamics. So, it is important to understand the price mechanism before trading in it.
Diversify Your Portfolio
The financial mantra ‘Don’t put all your eggs in one basket’ applies to commodity trading too. Minimize your risk and maximize your returns by investing across different products and categories. The risk-return trade-off will help balance your trades and protect against several financial losses during market fluctuations.
Monitor Market Trends
You have to continuously keep yourself abreast with market trends and news around commodities at both domestic and global level. This will help you to understand the direction in which the commodity market is moving, how it will impact the prices, and what investment strategies you should adopt to avoid losses.
Exercise Caution with Physical Commodities
If you decide to trade physical commodities instead of Exchange Traded Funds (ETFs), then make sure you put your inventory in a secure location and also get insurance coverage on it.
Seek Professional Services of Brokers
You can save yourself all the trading hassle by choosing a commodity broker in India. Brokers have the expertise and experience to trade in commodities. However, just make sure to avail service of only reputed, reliable, certified and the best commodity broker for the security of your investment and peace of mind. The broker should be able to understand your investment goals and give you correct advice.
Commodity trading is a good investment option for investors who want to diversify beyond equity trading.