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Commodity Trading Tips
A commodity is something that everyone uses. It is a basic resource such as natural gas, gold, wheat, oil or soybeans. The commodity exchange market exists so that producers and users of these commodities can speculate against the price fluctuations. When people buy futures contracts on these goods, it helps them to save their profits. Thus, commodity exchanges can be used as a mechanism for trading and making profits.
What is commodity trading?
Commodity trading can be defined as an act of investment that consists of buying and selling goods. In commodity market, traders deal with raw or primary products. Commodities are physical substances such as grains, oil, lumber, metals and food. These commodities are traded by investors through futures contracts. Traders trade in these commodities to take advantage of the price fluctuations.
Though there are a number of similarities between trading commodities and trading stocks, there is one major difference between the two. This difference can be attributed to what is marketed in both the markets. In stock market, stocks are traded while in commodities market, commodities and goods such as raw materials are traded. In commodity trading, goods traded are defined valuable thing and has a quality that is coherent and is produced in large quantities.
Benefits of Commodity Trading
While trading in commodities market, you require only a small percentage of total value in cash in order to trade in commodities.
It has very low commission costs. Also, the commodities are cheaper to sell/buy as compared to underlying instrument.
Futures contract are very liquid. The degree of liquidity depends on the type of commodity you are trading in. Electronically traded contracts are the most liquid when compared to pit-traded commodities such as orange juice, corn, etc. Pit-traded commodities are more costly in terms of spread and commission.
It is very easy to protect your profits in commodities market as future contracts can be easily sold once bought. This enables speculators to protect their profits when the market is falling down.
Commodity Trading Tips
In order to earn high profits in commodities market, you must follow certain tips.
Use the Best Time Frame – In order to earn profits while trading in commodities, try different time frames and find out the best time frame that suits you. The best place is to start with a daily chart as it is slow and will give you enough time to make decisions related to your investment. Later, you can head towards 1-hour chart to have more opportunities. After choosing your time frame, look forward to the next higher time frame. This will allow you to make huge profits.
Draw Trend Lines – A successful trader is one who draws trend lines by using the higher time frame. Look at the last three months data and find out if the price is going upwards, downwards or sideways. If it is moving upwards, there is a possibility of price going lower or higher. This will help you in making decisions and earning profits.
Use the Trend as Support/ Resistance – After knowing and understanding the market trend and trend lines, you can use the trend line as resistance and support. For example, if the trend is going upwards and it falls back down to the trend line, it is possible that it will move out of the trend line and it will continue going upwards.
Use the Commitment of Traders Report – You can use the commitment of traders report in order to make correct decisions. This report contains a record of the trades made by the commercials and large traders.
Use a Moving Average Cross-Over System for Entries –Once you have understood the market trend, you can use a moving average cross-over system. This tool will give you a signal when to buy and when to sell your commodities.
To succeed in the commodities market and to earn higher profits, these tips are very useful. These tips will help you determine which commodity you should trade in. It will also help you decide when to enter and when to exit the market.
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