Knowledge
What Is Commodity Trading?
Commodity trading is where various commodities and their derivatives products are bought and sold. A commodity is any raw material or primary agricultural product that can be bought or sold, whether wheat, gold, or crude oil, among many others. When you engage in commodity trading, such commodities can diversify your asset portfolio.
If you want to explore commodity trading, take the first step, and brush up on your basics. Get acquainted with the commodity market and how things work here.
Types of commodities
Before you begin commodity trading, learn about the types of commodities available for trade. Some common categories are:
- Agricultural (e.g. chana, soya bean, jeera, rice, rubber)
- Metals (e.g. industrial metals like aluminium, copper and lead, and precious metals like gold and silver) Non- Agri
- Energy (e.g. natural gas, crude oil, coal) Non- Agri
Commodity exchanges
To participate in the commodity market in India, you must know how to trade in commodity exchanges. A commodity exchange is a regulated market where the trading of commodities takes place. Traders may choose not to take physical delivery of commodities and instead deal in Futures contracts. A Futures contract is an agreement to buy or sell a fixed quantity of a commodity at a pre-decided price and within a stated expiry date.
Here are the commodity exchanges in India:
- Multi Commodity Exchange of India Ltd (MCX)
- National Commodity and Derivative Exchange (NCDEX)
Trade in commodity futures
Many traders in the commodity market in India trade through Futures contracts. Businesses use Futures to hedge against the prices of commodities that they handle to minimize the risk of financial loss. The commodity market in India also draws participation from speculators.
Benefits of commodity trading
- Diversification – Commodity returns have a low correlation to returns from other assets. As an individual asset class, commodities can be considered to diversify your investment portfolio.
- Inflation safeguard – Commodities are considered a good hedge against inflation as their prices tend to rise during periods of high inflation. This helps maintain the purchasing power parity.
- Hedge against event risk – Supply disruptions during a natural disaster, an economic crisis, or war could push up the prices of commodities. However, the trading of commodities could help you guard against loss by leveraging strategically on price swings. For instance, to lock in the input price of a raw material, a consumer could take a long hedge by buying a Futures contract based on the commodities price today. Meanwhile, a producer that is aiming for a high sale price could choose a short hedge by selling a Futures contract.
Benefits of commodity trading with Trade Edge
Know the advantages of being a Trade Edge customer when you open a commodity trading account with us.
- Operational support: From explaining how to open a commodity trading account and other commodity trading basics, to resolving order-related issues, we support you at every step.
- In-depth research: Make the most out of our commodity research reports and snapshots. We provide outlooks on active commodities in Bullions, Metals, Energy and Agri.
- Trade recommendations: Get detailed buy and sell recommendations in real-time for commodity market trading.
- Educational resources: Hone your knowledge of commodity trading basics with our comprehensive guides to the commodity market.
- Corporate advisory: Our corporate desk advises on hedging strategies and monitors your positions. We help you withstand market fluctuations to generate high risk-adjusted returns.
Knowledge Bank
Technical analysis of Chart | Commodity Market analysis
Intraday trading guide for beginners
Intraday trading, also called day trading, is the buying and selling of stocks and other financial instruments within the same day. In other words, intraday trading means all positions are squared-off before the market closes and there is no change in ownership of shares as a result of the trades.
Until recently, people perceived day trading to be the domain of financial firms and professional traders. But this has changed today, thanks to the popularity of electronic trading and margin trading.
Today, it’s very easy to start day trading. If you want to start, read on to understand the basics of intraday trading:
HOW IS INTRADAY TRADING DIFFERENT FROM REGULAR TRADING?
There’s only one difference between a regular trade and intraday trade. It lies in taking the delivery of the Commodity/Stocks.
In intraday trading, you square-off your positions the same day. So, your sell order offsets your buy order. This way, there is no transfer of ownership of Commodity/Stocks. A regular trade gets settled over a span of days if not longer. So, you get delivery of the shares you bought while the shares you sold move out of your demat account .
What is the difference between Demat and Trading account?
The key difference between a Demat and a Trading account is that a Demat account is used to hold your securities such as your share certificates and other documents in electronic format whereas a Trading account is used for buying and selling these securities in the Commodity/Stock market.
Knowledge Bank
Technical analysis of Chart | Commodity Market analysis
Intraday Trading Indicator & Strategies
Intraday trading decisions are usually made based on price movements. But not all traders may be equally adept at reading and interpreting these movements. This is why many intraday traders depend on some indicators to help them arrive at the right decisions.
That said, remember that intraday trading requires precise timing of sell/buy decisions to be profitable. As such, using too many indicators can be counter-productive too as they can slow down your decision-making. Plus, many indicators present the same information with a slight variation. This makes some of the indicators redundant.
Types of Trading Indicators
Broadly speaking, intraday trading indicators come in 6 flavours. Experts recommend following one indicator of each type for most decision-making. However, you can follow more indicators as per your convenience. These flavours are:
1. Oscillators: This is a group of indicators that move up and down between an upper and lower bound. Examples of this type of indicator include: Relative Strength Indicator (RSI), Commodity Channel Index (CCI), Stochastics, and Moving Averages Convergence Divergence (MACD).
2. Volume: This flavour of indicators mainly relies on trade volumes. They also combine this volume data with price data. This helps indicate the strength of a trend. Such indicators are Chaikin Money Flow and On Balance Volume (OBV) among others.
3. Overlays: These are indicators that are overlaid directly on the price movement and are not shown separately. These serve a variety of purpose and some traders may use multiple overlays as well. Popular examples of this type of indicators include: Bollinger Bands, Parabolic SAR, Keltner Channels, Moving Averages, and Fibonacci Extensions and Retracements.
4. Breadth indicators: These indicators show how the stock market at large is behaving. They do not directly show how a stock being monitored behaves. Examples include Trin, Ticks, Tiki and the Advance-Decline Line.
5. Trend: Trend indicators help to capture gains from an asset’s momentum in a given direction. These highlight the direction in which the market is moving. They also offer hints on the strength and likely continuation of a trend. Moving Averages, RSI, and OBV are examples of trend indicators.
6. Volatility: These indicators show the extent of price change over a given period. When volatility is high, price swings are expected. When volatility is low, price fluctuations are more subtle. Depending on the market condition, one could use indicators like Average True Range and Bollinger Bands.
Useful Indicators for Intraday Trading Beginner
Now that you have a basic understanding of the broad types of indicators, here’s a list of indicators that are likely to be useful for a beginner intraday trader.
- Moving Average: A Moving Average (MA) is a line showing the average closing price of a stock for a given period. As the price movements have a volatility, it may not always be clear if the price movement has any long-term trend. MA isolates this trend by showing the average closing price over a period. A short-term average higher than the long-term average usually indicates that the market is bullish about the stock under consideration.
- Bollinger Band: This is a band that shows how the price deviates on average from the moving average over a period. Traders believe that the stock price is likely to trade within this band. So if a stock is trading under the Bollinger band, traders expect it to rise and vice versa.
- Momentum Oscillator: This indicator shows how strong the demand for a share is at a given price point. For example, if the share price is rising and approaching the weekly high, but the momentum oscillator is falling, a trader infers this to indicate that the price will soon turn as the demand for the share is falling. On the other hand, a rising momentum oscillator shows that the trend is strong and is likely to continue to hold.
- Relative Strength Indicator: RSI is one of the most popular oscillators. It tracks the last 14 periods by default and shows the strength of a price. It does so using an index that ranges between 0 and 100. If the RSI is at 70 or above, it could indicate that market is overbought. This means a price fall or a correction is due. On the other hand, if the RBI is below 30, it could indicate that the market is oversold. Traders then expect the price to start rising soon.
- Commodity Channel Index: CCI measures the difference between the current market price of an asset and its historical average. A CCI above zero indicates the price is above the historic average. If it is below zero, the price is below the historical average. CCI can rise or fall indefinitely. So, it is used to assess if an asset has been overbought or oversold. Traders check this for individual assets by studying the historical extreme CCI readings at which a price reversal occurred.
Intraday Vs Positional Trading: Which One Should You Prefer?
Investing in the stock market is among the most sought-after skills, which is why millions of people trade and invest money on public exchanges every day. When starting off as a trader there are two ways in which one can trade: positional or as an intraday trader. You can either trade (intraday) or you can patiently wait to extract your profits from these in the long term (positional trading). Both of these strategies are commonly practiced in the market with Intraday trading being more preferred among traders.
If you are seeking mainly short-term benefits, a form of trading worth trying is intraday trading. In fact, this type of trading involves purchasing and selling stocks as well as other financial instruments within a single trading day. Hence, intraday trading aims to capture the smaller market movements. However, there is another way one can gain through the stock market: positional trading. Positional trading can be placed in between intraday trading and long-term investing.
Positional trading involves carrying overnight positions that are based on risk management, the chosen approach of trading, and the interest time frame. Positional trades involve holding only shares for a timeframe that can be between 1–2 days upto months so that one can book profits. It is completely up to you when you want to exit your position as a trader. The markets are highly volatile and thus intraday trading can appear to be a bit risky to some traders, therefore they choose positional trading because it provides a longer time frame.
Intraday Trading vs Positional Trading
By taking a detailed look at both styles: intraday trading and positional trading, you can learn to pick which style is the appropriate trading strategy for your needs.
Intraday Trading
As suggested by the name itself, intraday trading involves taking new positions after the opening of the market while also closing those positions on the same day prior to the market closing. As an intraday trader, you are likely to close your position by the end of the trading day, no matter whether it ends in a profit or a loss. Hence, intraday trading aims to make a profit out of the smaller market movements.
Since traders can trade in late positions with high leverage and a very small exposure, intraday trading is widely practiced. In case of trading that is leveraged-based, you are required to exit your position fifteen to thirty minutes prior to the market closing. If one does not exit their position, the broker will automatically square off all positions. When you desire to convert your intraday position into delivery, you need to be paying the complete amount for the same to your brokerage. These procedures must be completed prior to the market closing.
Since it requires that you are active in the entire train session, intraday trading is suitable only for full-time traders. Markets are highly volatile, so if you were to miss out on your target, your portfolio may begin to bleed. The primary advantage intraday affords to traders is trading at high leverage. High leverage or margin trading comes with the benefits of big wins but it also comes with the potential for bigger losses.
Positional Trading
In recent years, trading positionally has gained a lot of popularity as it eliminates one of the biggest risks of intraday trading: having to square off one’s position by the end of one’s trading session. Trading positionally allows one to hold their positions as per one’s needs, for one or more days, weeks or months. With positional trading, one’s time frame will not be fixed, but rather, it can be selected based on the nature of one’s trade.
Due to its flexibility in holding positions, positional trading requires a higher working capital but comes with a greater risk-bearing capacity. Depending on who your broker is, you may require 50% or more of your capital as a margin simply to carry future contracts overnight. Higher ranges of positional trading may lead to a greater stop-loss risk. For instance, you can make use of a stop-loss that is worth fifteen to twenty points for your intraday trade of a Nifty Futures Contract. For a positional trade that is long-term, however, you will be required to use a stop loss that is roughly forty to 150 points.
You might have over 20 trades within a week with intraday trading. With positional trading, you will only have two to five short-term positional trades. So basically, you may have over 20 trades in a week with intraday, but with positional trading, you will only be having 2–5 short term positional trades. Based on one’s stop loss, it is evident that one’s risk tolerance might be the same or even lower with positional trading.
When you choose to hold your position from a few weeks to months, this is known as long-term positional trading. As a result of the larger trading ranges, here the risk levels of a stop loss can reach as high as 200 points, while at the same time, one’s rewards will also go higher up — to 1000 points or even more. In fact, it is recommended that one should first get hands-on with intraday trading as well as short-term positional trading prior to stepping into the world of long-term positional trading.
The Bottom Line
The answer about which type of trading is best for you depends on the following factors. If you have low capital affordability, going with intraday trading is a smarter move as positional trading requires a higher capital. Another factor to consider is how much risk you can bear. Intraday is a high-risk trade. If you can accept a high amount of risk, intraday trading may be more suited to you over positional trading, the latter of which involves moderate to high risks. A final parameter is your time frame. A full-time trader who wishes to remain glued to their screen should consider going for intraday trading, whereas someone who wishes to trade on the side or cannot dedicate their entire day to it, can opt for positional trading.
