10 basic rules of commodity trading

 

In recent times, the craze of commodity trading among people has increased tremendously with more and more people rushing to invest in commodities. But not all of them are able to get desired results due to many reasons. The lack of knowledge is one of them. If you are looking to invest in commodities, it is necessary to get your basics right. So, let’s find out what commodity trading is and what are the basic rules of commodity trading.

What is Commodity Trading?

Commodity trading​ encompasses the buying and selling of a wide range of instruments such as oil and gas, metals including gold and silver and soft commodities like cocoa, coffee, wheat and sugar.

Commodity trading is as deep-rooted as the financial markets, and maybe even older than that. The first example of an organised exchange for trading commodities traces back to Amsterdam in 1530. Nowadays, the updated technology has made it to trade with just a few clicks of a mouse, but some commodities stay as prevalent as ever.

When it comes to trading in commodities, it is recommended to take special precautions as it is believed that small mistakes tend to cause big mishaps in the long run. Even if you are dealing with the best commodity broker in India, it is more than necessary to follow the basics that will help you get desired outcomes.

Here are the top 10 basics of commodity trading that you just need to know.

1.      1. Pick the most appropriate stocks

It is worth the stock you choose that further drives the results. So, it is highly imperative to choose the right stocks that tend to be highly liquid. If you don’t, you are more likely to face various issues against your investments.

2.     2.  Don’t try to be a trendsetter - Do not put effort to become a trendsetter or the first one to know where a specific trade would perform. No one can possibly be the best seller or buyer except by pure coincidence – so why waste your time and efforts? You could end up losing a huge chunk of money and become a joke to others. Rather, "Silently" follow the trend and make upright profits.

3.      3. Don’t believe in rumors – Always remember that everything has a logic behind it and you need to be specific about it. All your investment decisions must be based on proper research. You have to be in close contact with the markets all the time to know which element influences the market and in turn your stocks. Continuous monitoring of the stock whose shares you trade is extremely necessary to make the best move. Take your decisions based on solid evidence supported by research reports and correct information from the right source.

4.     4. Take measured risks – When it comes to taking risks on your stock investments, it is recommended by the best broker for trading to stay cautious and take all the underlying factors into considerations before moving ahead.

5.     5. Emotion has no place in investing – It is a thumb rule that not a single decision of yours should be driven by emotions.  Always think sensibly before investing and go with the stocks that have exhibited remarkable performance over time and not the ones that you have your emotions attached.

6.     6. Pursue only one analyst’s or technical advisor’s recommendation at one point in time, as diverse recommendations would only add to a lot of confusion. When the earlier guidance proves to be less productive or loss-intensive, you can choose or keep an eye out for alternative guidance, but not at the same time.

7.     7. Be patient - When your trade positions are going in the desired paths, be patient to yield full profits and ensure profits by adlibbing the stop-loss level on a daily basis. Don’t be pessimistic here, or you'll end up booking profits too soon and later be apologetic. This might lead to traders re-entering the same trade at upper levels and panicking out at minor reversals, corroding previous small profits and increasing losses. It's not about whether you're right or wrong; it's about how much money you make when you're right and how much money you lose when you're wrong, and that's what differentiates the winners from the losers.

8.     8. Stay aware of the latest info – It is recommended now to follow the rules of the past as in today’s dynamic stock market scenario, nothing is permanent. Be ready to embrace and execute change on a continual basis, since “change” is the only constant in the world; everything else changes, and this is chiefly true in the ongoing highly unpredictable and ever-evolving market environment.

9.     9. Do not borrow or deal with other people’s money, or borrow more money to hang on to loss-making deals. Just trade with money you have in hand that you can afford to lose and be emotionally prepared to lose it all in the worst-case scenario.

1010.   Prefer stop loss - This is one of the most sought-after ways to bring down your loss and thereby hold the gains you have made. You can correct stop loss for your stock wherein your stock will get sold off when the price hits the specific stop loss level. Use stop loss in your trades to control losses.

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FAQs

What does commodity mean?

A commodity refers a physical asset, which is yielded in such volume that its value can be traded on the open exchange. The price changes regularly, and commodities can be bought and sold at a future date using futures contracts. Futures contracts are employed because of the size and weight involved in moving these large volumes of commodities.

What do you mean by basis?

In the case of commodities trading, basis refers to the change between a commodity’s futures price and its cash price.

What is a breakeven selling price?

This is the price a producer, or grower, must need to get for a commodity to recompense their costs of producing that commodity.

What do actuals mean?

 In simple language, actuals refer to the physical commodities being bought and sold in the markets.

What is a cash price of a commodity?

 

The cash or spot price of a commodity refers to the exact amount of money exchanged when commodities are bought.