Published : September 26, 2020
Everyone involved in commodity trading, be it a new trader or an experienced trader, is aware of the risk involved in the commodity market. There are several things that an experienced trader is well aware of, however, which might not be known to a newbie.
Commodity trading, as the term itself, suggests, means buying and selling of the top commodities in the world including gold, silver, oil, metals, etc. through dematerialization. The sole purpose behind commodity trading is to make profits from the fluctuations in the prices of the commodities which happens almost constantly. However, since the commodities markets remain volatile, the chances of earning profits and of incurring losses are equal.
To enter into the commodity market, you need to open a Commodity Trading Account. The best way to enter the commodity market is to look for brokers offering zero brokerage commodity trading accounts with good margin facilities.
As mentioned, the chances of earning profits and of losing money are equal in commodity market trading, hence it is beneficial for the trader to be aware of the market strategies and hacks. These commodity trading hacks and strategies might not completely mitigate the risk and volatility involved, but will surely reduce the traders’ chances of incurring losses.
Here are some of the top commodity trading strategies by expert traders to be used to earn profits:
Understanding the seasonality of commodity markets: Most of the commodity market traders who lack experience tend to ignore the seasonality involved in commodity markets. This makes the first strategy one of the most overlooked strategies. Traders should keep in mind that seasonality plays an important role in determining and predicting the prices of the commodities. This is also because commodities are real-world items and their availability and use are dependent on the season.
For instance, the availability of grains is dependent on the season and hence follow a pattern. Though seasonality is something to be taken into consideration, it does not guarantee profits. For instance, some external factors like heavy rainfall can affect the production of crops which might impact its price.
There are various trading apps that can help you in predicting the prices of the stocks by helping you learn about seasonality.
Focus on one commodity: There are various commodities available on MCX and NCDEX for the traders to trade-in. However, the key to ensuring success lies in focusing on one commodity or on commodities belonging to a specific segment like base metals. This is one of the most powerful and useful commodity trading strategies that should not be missed.
Focusing on specific commodities will help you conduct in-depth research related to the price movements of those commodities. You can also effectively study the past trend and make profitable trading decisions. Furthermore, if you invest in many commodities from different segments it is easier for you to be distracted.
Study the markets and take positions accordingly: Commodity markets, just like stock markets, are highly volatile. Thus, it becomes crucial for traders to study the markets thoroughly before taking trade positions.
According to the experts, the right time of purchasing a commodity is when the markets are moving from normal to bullish. Traders should use the stop loss position to prevent losses beyond the support level. Similarly, the right time to sell the commodity is when the market has turned bearish by holding resistance on short positions with stop-loss.
Conducting Fundamental Analysis: Commodity trading is primarily based on the concept of supply and demand. If the demand for a commodity is low while the supply has increased, the price of the commodity, as a consequence, will decline. Similarly, if there is a shortage in supply while the demand for the commodity is high, the prices of the commodity will shoot up.
This principle calls for in-depth research to be conducted on part of the traders regarding the commodities they are willing to invest in. A clear understanding of the demand and supply factors will help the traders in making better trading decisions. This strategy is time-consuming and requires a lot of patience from the traders, hence beginner traders make a mistake of ignoring this strategy. The strategy of conducting a fundamental analysis of the commodities will help you earn profits in the long-run.
Breakout Trading: As per this commodity trading strategy, the trader makes a move at the beginning of a market trend. This particular stage witnesses high volatility and major price movements. Therefore, mastering this trading strategy can offer good chances of earning profits with reduced commodity trading risks.
In breakout trading, a breakout is an event when the price of the commodity either moves below the upper or the lower range of the commodity price. If it crosses above the higher value then the trader would go in a long position. Similarly, if it falls below the lower value of the range the trader would enter the short position.
The prices of the commodity shift in the direction of the breakout. It is an important trading strategy because the breakouts are the points from where the future trend of the prices emerges. Thus, managing this strategy well will ensure significant profits from commodity trading.
All these commodity trading strategies and hacks will help commodity traders to considerably reduce the risk involved and help traders increase their probability of earning profits.
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