Trading in commodities is one of the best ways to generate income. The commodity market is a highly liquid market with a lot of participation from both retail and institutional investors. If you’re planning on entering into commodity trading, then it is important for you to be aware of certain key things. So here are 4 tips that you can use to help make commodity trading a whole lot easier.
A large part of the commodity market is very cyclical in nature. This is especially true in the case of agricultural commodities. Therefore, as an investor, it would be prudent for you to study the market cycles, harvesting and production patterns of different commodities.
This can help you trade in a much better manner and help you take positions accordingly. Also, it would help to get to know the demand and supply pattern of the commodity in which you would like to trade as well, seeing as the price movement relies on it heavily.
One of the many advantages of commodity trading is that leverage tends to be much higher than the stock market. This effectively means that you can take on larger positions by simply depositing a small amount of margin money.
While this can be advantageous since high leverage can multiply your returns, it can also be disastrous. If the market doesn’t move according to your expectations, high leverage trading can lead to severe losses. Therefore, it is crucial to be cautious when using leverage to trade in commodities.
One of the major factors influencing the price movement of commodities is geo-political and geo-economic news. Unfavourable economic or geo-political conditions can disrupt the demand and supply consensus of the commodity market, which can ultimately lead to a sell-off.
Therefore, as an investor, it is important for you to constantly keep an eye out for such news. This way, you can stay ahead of the curve and take corrective trading measures in the case of a black swan events or unpredictable events.
Depending on the commodity that you’re trading in, it may experience occasional bouts of volatility. This is especially true in the case of seasonal commodities. Some commodities like crude oil naturally tend to have higher volatility.
While volatility can help you earn more profits, it can also be very disastrous if the market moves contrarily to your position. Also, an increase in the volatility can lead to higher margin requirements and lot sizes as well. As an investor, it is essential for you to take all of these points into consideration and place trades accordingly.
Now that you’ve seen the 4 most important commodity trading tips that you should be aware of, it is time that you get right into it. That said, having an active demat and trading account is mandatory to start trading in commodities.
You can open a demat account and a trading account within a few minutes through an entirely paperless process by visiting the website of Motilal Oswal. So, what’re you waiting for? Head over to the website and open an account for yourself today.
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