Commodity Trading Basics
by 5paisa Research Team Last Updated: 2022-03-23T14:15:14+05:30
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Commodity trading has emerged as an excellent alternative to conventional investment instruments in recent times.

Some investors say that commodity trading is easier than stock trading since the volatility is significantly low (except for some agricultural commodities and metals) and predictable. Commodity trading also lets investors diversify their asset allocation strategy, hedge against inflation, get decent leverage, and provide many other benefits.

Investors also say that since many commodities are cyclical in nature, meaning the prices increase during the same period every year, it makes it relatively easy to make money. However, as with any investment, proper knowledge is vital to make decent profits, and commodity trading is no exception. Dive into the following sections to get some ultimate commodity tips for winning trades in the commodity market.

4 Best Tips For Successful Commodity Market Trading

Treat Leverage With Caution

Unlike stock trading, commodity trading is characterised by high leverage. Leverage refers to the margin you need to pay to place a trade. For example, the margin is usually 10% in index futures, and it is typically 15% in stock futures. However, in the case of commodity trading, the leverage can be as high as 16 times. Also, you can increase it even further if you put a cover order with stop loss.

Investors looking for commodity market tips often feel fascinated by leverage and enter the market to make high profits with low investment. But, leverage might be a double-edged sword if not treated with caution. While leverage can increase your profits manifold, it can also magnify your losses (if the market goes in the opposite direction). 

Hence, it is wise to evaluate the benefits and disadvantages of leverage before trading in the commodity market.  

Understand The Market Cycle

Commodities generally follow a cycle depending on various demand, supply, geopolitical, and economic factors. Investors relying on commodity market tips factor in the cyclical nature while placing trades. The more accurate your observations, the better profits you may make.

The demand-supply process generally follows a fixed system as mentioned below:

1. The demand for commodities increases due to various factors. For example, the demand for gold increases when geopolitical tensions erupt.

2. To meet the rising demand, the producer increases their capital expenditure on production.

3.The commodity price moves up due to enhanced demand and higher capital expenditure.

4. However, when the price reaches its pinnacle, buyers control their urge to buy the commodity, resulting in less demand. 

5. Less demand leads to a surplus in supply, and producers/manufacturers reduce the commodity’s price to revive the demand. 

6. Since less demand leads to less capital expenditure, it also means less supply. The process enables the manufacturer/producer to achieve a demand and supply equilibrium.

Expert investors know the market cycle quite well and know the best time to place their trades. Hence, to make more sense of the commodity market and eventually profit from it, you must observe and understand the market cycle well.

Make Volatility Your Best Friend  

Volatility is part and parcel of a trader. Perhaps the best commodity market trading tips are those that enable you to understand and benefit from volatility. 

While some commodities are highly volatile (such as copper or agricultural commodities), some are less volatile (such as gold, crude oil, etc.). Low-volatile commodities generally follow a set trajectory within a broader long-term trend. For example, during the peak of the COVID-19 pandemic, oil prices collapsed and continued their downward journey for quite some time. And, for an investor, such times can be the best for making money from commodity market trading.  

To make volatility your friend, you must understand the broader trend and the price range of the commodity you wish to trade. Also, every time you trade a commodity, you have to choose the lot size.
Inexperienced traders choose the lot size depending on the margin availability. However, expert investors always evaluate the volatility, and not margin, of a commodity while determining the lot size.  

For beginners, it is wise to start with low-volatile commodities before moving on to high-volatile commodities. Once you get the heck of price movement, the commodity market tips you get from your broker will make more sense to you. 

Select The Best Broker

The most underrated of all commodity market tips you would find on the internet is the one that matters the most - the broker.

A broker plays a prominent role in determining the benefits of trading in commodities. For example, if the broker’s online platform is slow, the order execution might get delayed. Moreover, if the brokerage is too high, your actual profit might be less.

Fortunately, many online brokers let you open a free online account and trade with 0% brokerage. Moreover, they also provide an app for carrying out online transactions on the go. Additionally, you can learn about commodities by reading the blogs published on their website.

The EndNote

Now that you know the best commodity market tips, it’s time to wear the trader’s hat and start testing your knowledge. 5paisa offers free Demat account opening and many other benefits for giving you the correct thrust. Click on this link to take your commodity trading experience to new heights.

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