Most of us hear lot about commodity trading as they are hot products in today's financial world. I believe that they are going to rule the future. But we have lot of "ifs" and "buts" about commodity trading. I tried to submit my view on commodity trading from my short span of experience.
- If you are a true follower of technical analysis.
- If you are a person who can obey to the mechanical system without any manual intervention.
- If you are a person who can trade only with 50% of the capital to manage MTM requirements.
- If you are person who believes that swing trading can make you rich than intraday trades.
- If you are a person who can simply ignore all noise about markets from media, forum etc..
- If you are a person who has a mental fortitude to just follow price despite of any good, bad and ugly events.
- TA is precise when applied with commodities compared to equities. Of course, you must follow one system consistently.
- Almost traded 24 hrs in a day. It’s actually an advantage as you are in a position to manage trades when it reacts to any news/events across globe
- Traded globally with high volumes. Group of people cannot control prices.
- If you are trading in Nifty future, only alternate is bank nifty future and there is no other alternate apart from stock futures. But each major commodity is like one nifty future.
- Risk reward ratio is excellent in commodities.
- Great liquidity with low margin requirements.
- Rapid moves kill your trades. Of course, if you are not a disciplined trader. If you are well armed with right system and stop loss guard, these rapid movements are actually a gift to traders.
- It requires more time. Overtime pays extra J. But on serious note, we don’t need to spend all our time in terminal if we do positional trades. I personally feel that positional trades are good. So, we can simply place orders and forget it. But the extra effort whatever we are putting in commodities is real worth in terms of profit compared to equities.
- You may have to take the physical delivery if contract is not squared. Can you imagine, your nifty future contract will stand unsettled due to no buyer or seller?. In the same way, it will not happen in commodities too. Exchanges and brokers have systems in place to make sure that your contracts are rolled-over or squared well before market close on the expiry day.
- I have never seen my book in green with nifty itself. How can I think about commodities?. This was the main concern holding me back when I thought about commodities. But, the fact is different. Due to the volatile nature and higher range of price movements, commodities make you more disciplined and organized. You will realize within 2-3 trades that how disciplined you should be to keep survive in this market. I always thank commodities as it keeps me standing on my toes always.
- Very sensitive to global events. Yes, but I see it as an opportunity rather than nuisance. I have observed that TA makes you to enter on the right side well before any event/news. There will be a huge volatility but your SL will save you for sure. Even if you have to reverse the trade with huge loss, don’t hesitate but do it and the reversed trade will give you huge profit after compensating the previous loss.
- Start checking charts from metatrader platforms, forexpros, stockcharts etc.. All the major commodity charts are available here and data too available.
- Apply your TA knowledge with these charts and observe them.
- Don’t do paper trade for long time. Start real trades in small quantities.
- You can start real trading with smaller contracts such as silver micro and lead/Zinc mini etc where margins are very low like mini nifty.
I will prioritise the commodities as below to start the trading.
Above said energy, metals and precious metals contracts are traded with volume in MCX.
Agro commodities like Pepper,Guarseed etc are traded with volume in NCDEX.
Any system which helped to take profits in equities, nifty future can be used for commodities. But due to bigger range of prices and volatility, success ratio might differ between nifty and commodities for the same system. So, I will personally advice to back test systems with both nifty and commodities for relative performance and settle with the specific system accordingly.
Moving average cross over will lag the entry and exit in commodities due to higher range of the price movements. This is just my personal observation. We can still use MA with other appropriate tools attached to it. I always believe that approach is important with commodities rather than the TA system.
What are the Don’ts?
- Never over trade.
- Never average when the first trade is in loss.
- Never do blind trade. Always follow the entry and exit as per your study of TA.
- Never hesitate to exit at stop loss even for a single trade. Always remember that you are trading the contract which is being traded simultaneously across globe.
- Avoid small range counters like zinc, lead and aluminum when you are in initial phase of commodity trading.
- Don’t react to news or events. Just follow the signals from your system.
- Never ever predict or assume the price levels to make quick entry and exit. Just follow price action.
- Always trade only with 50% capital.
- Always trade with fixed position for certain period.
- Try to do multiple lots per contract. Off-load part qty whenever you have profit.
- Have a eye on commodity prices on dollar value too i.e, listed in NYMEX,CME and COMEX.Prices from MCX are dependable to INR value. So, even if the commodity has run up in its original dollar value, MCX price may not proportionately move up but lag slightly. This may impact MCX based TA levels in a slight way which may lead to whipsaws.
- Whenever U.S markets are closed, trade less on those days as movement will be less with low volumes.
- Exit only at stop loss. Don’t try to exit due to volatile moves. Commodities always shake weak hands.
- Trades based on any SAR system should be traded with filters. Especially after the bigger trending moves, allow more % of filter than normal. This will keep you engaged in right trade.
All the above are from learner's perspective. I have not gone deep into subject. Please use as an preliminary source on your search about commodities trading.If you have any doubts, please feel free to post in comments and i will try to clear them as much as possible.
I have made this presentation based on my commodity trading experience only. So,if you are serious about commoditiy trading please check this presentaion also before start trading.
Commodities to whom ?
- If you are a true follower of technical analysis.
- If you are a person who can obey to the mechanical system without any manual intervention.
- If you are a person who can trade only with 50% of the capital to manage MTM requirements.
- If you are person who believes that swing trading can make you rich than intraday trades.
- If you are a person who can simply ignore all noise about markets from media, forum etc..
- If you are a person who has a mental fortitude to just follow price despite of any good, bad and ugly events.
Why commodities?
- TA is precise when applied with commodities compared to equities. Of course, you must follow one system consistently.
- Almost traded 24 hrs in a day. It’s actually an advantage as you are in a position to manage trades when it reacts to any news/events across globe
- Traded globally with high volumes. Group of people cannot control prices.
- If you are trading in Nifty future, only alternate is bank nifty future and there is no other alternate apart from stock futures. But each major commodity is like one nifty future.
- Risk reward ratio is excellent in commodities.
- Great liquidity with low margin requirements.
What are all wrong myth about commodities?
- Very sensitive to global events. Yes, but I see it as an opportunity rather than nuisance. I have observed that TA makes you to enter on the right side well before any event/news. There will be a huge volatility but your SL will save you for sure. Even if you have to reverse the trade with huge loss, don’t hesitate but do it and the reversed trade will give you huge profit after compensating the previous loss.
Where should start?
- Start checking charts from metatrader platforms, forexpros, stockcharts etc.. All the major commodity charts are available here and data too available.
- Apply your TA knowledge with these charts and observe them.
- Don’t do paper trade for long time. Start real trades in small quantities.
- You can start real trading with smaller contracts such as silver micro and lead/Zinc mini etc where margins are very low like mini nifty.
What are the commodities can be considered for trading?
I will prioritise the commodities as below to start the trading.
1. Crude oil
2. Copper
3. Silver
4. Gold
5. Nickel
6. Lead
7. Aluminium
8. Zinc
Which exchange is better ?
Above said energy, metals and precious metals contracts are traded with volume in MCX.
Agro commodities like Pepper,Guarseed etc are traded with volume in NCDEX.
What are the margin and lot size?
Which TA system is best?
Any system which helped to take profits in equities, nifty future can be used for commodities. But due to bigger range of prices and volatility, success ratio might differ between nifty and commodities for the same system. So, I will personally advice to back test systems with both nifty and commodities for relative performance and settle with the specific system accordingly.
Moving average cross over will lag the entry and exit in commodities due to higher range of the price movements. This is just my personal observation. We can still use MA with other appropriate tools attached to it. I always believe that approach is important with commodities rather than the TA system.
What are the Don’ts?
- Never over trade.
- Never average when the first trade is in loss.
- Never do blind trade. Always follow the entry and exit as per your study of TA.
- Never hesitate to exit at stop loss even for a single trade. Always remember that you are trading the contract which is being traded simultaneously across globe.
- Avoid small range counters like zinc, lead and aluminum when you are in initial phase of commodity trading.
- Don’t react to news or events. Just follow the signals from your system.
- Never ever predict or assume the price levels to make quick entry and exit. Just follow price action.
What are the Do’s?
- Always trade only with 50% capital.
- Always trade with fixed position for certain period.
- Try to do multiple lots per contract. Off-load part qty whenever you have profit.
- Have a eye on commodity prices on dollar value too i.e, listed in NYMEX,CME and COMEX.Prices from MCX are dependable to INR value. So, even if the commodity has run up in its original dollar value, MCX price may not proportionately move up but lag slightly. This may impact MCX based TA levels in a slight way which may lead to whipsaws.
- Whenever U.S markets are closed, trade less on those days as movement will be less with low volumes.
- Exit only at stop loss. Don’t try to exit due to volatile moves. Commodities always shake weak hands.
- Trades based on any SAR system should be traded with filters. Especially after the bigger trending moves, allow more % of filter than normal. This will keep you engaged in right trade.
All the above are from learner's perspective. I have not gone deep into subject. Please use as an preliminary source on your search about commodities trading.If you have any doubts, please feel free to post in comments and i will try to clear them as much as possible.
I have made this presentation based on my commodity trading experience only. So,if you are serious about commoditiy trading please check this presentaion also before start trading.
Good luck!!
3 comments:
AZ, hats off to you, you got a fantastic way of writing :))
Believe me, the post is so so easy to read, and each point is hit right on the head of the nail, so crisp and meaningful.
When one reads your post as well see the powerpoint presentation one cannot help but see a great author behind.
Have a great looong (one 'o' for each day) weekend!!!.
moh
Thanks moh for dropping.
When it's me, you are never short of words :)
thanks for shearing your personal experience, very worthy, because this experience cost u much,
but not finding any recent post? waiting for your insight of trade,
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