Free Intraday Tips, Commodity Market in India – Commodity Basics
This is a Lot (bunch of some quantity) of some quantity of a commodity. This Future Contract has an expiry date (like 19 October 2016, it means if investor trade the contract of this expiry date, this contract will be automatically squared off on 19 October 2016). Investor can also square it off himself before expiry date. Different commodity contracts have different expiry dates. Future Contracts can be traded in both the directions i.e. can be sold or bought. It means it is not required to buy before selling the Future Contract. To see the expiry dates of Future Contracts you can follow thelink .
What is Square Off ?
It means selling if you have bought or buying if you have sold a Commodity Future Contract. It is called exiting from a running trade.
Why do we Square Off ?
If we want to book profit or loss, then we have to square off our position. We can square of our position partially also. Let’s say an investor having 5 Lots of Crude Oil. The investor can square off 1,2,3,4 or 5 Lots at a time. Partial square off is done to book profit or loss partially. On expiry date square off will happen automatically.
Long Trade and Short Trade (or Short Selling)
When a trader buys something, it is called Long Trade and when a trader sell something without buying it, then it is called Short Trade (or Short Selling).
Stop Loss Order
Stop Loss Order is a buy or sell order, which is placed to limit the loss. It is placed in opposite direction of our position. If a trader is having long trade then sell order will be placed and if a trader is having short trade then buy order will be placed. This order is placed at a trigger price. As the spot price become equal to this trigger price, Stop Loss Order will be executed and trader will be out from his position. Let us say spot price of a commodity is ₹ 100 and we are planning to take risk of 5% then there will be two cases, in first case say trader is having long trade then he will place a Stop Loss Order at ₹ 95 and in second case say trader is having short trade then he will place a Stop Loss Order at 105. These prices ( ₹ 95 and ₹ 105) are called trigger prices.
What is a ‘Lot’ ?
Lot is a bunch of some quantity of a commodity. Let us take example; mega contract of Aluminum contains 5000kg quantity. This 5000 kg quantity is called Trading Unit or Lot Size for this Aluminum Future Contract. In this ‘kg’ is called Base Value for this Future Contract. The price of commodity we see in market is for this Base Value only. If in market we see price of Aluminum ₹ 105, it means this is the price of 1kg (i.e. Base Value) quantity of Aluminum. If trader wants to trade commodity then he can only trade whole Lot. We cannot trade 4500kg of Aluminium in Stock Market; we have to trade in multiples of Lot Size only. There are different Lot Size and Base Values for different Commodity Future Contracts. To know the Lot Size and Base Value of Commodity Future Contracts you can follow the link.
Is there commodity of only single Lot Size ?
No, there are generally two types of Future Contracts for each commodity according to the Lot Size, Mini and Mega Future Contracts. Like for Aluminium Mini Future Contract has Lot Size of 1000 kg. To know the Lot Size of Mini and Mega Future Contracts you can follow the link.
Is there Future Contracts with only single expiry date ?
No, there are generally four types of Future Contracts for each commodity. Like if we see on 1st October 2016, there will be four Future Contracts with Oct 2016, Nov 2016, Dec 2016 and Jan 2017 expiry dates. The Future Contract of closest expiry date has more volatility (i.e. more buyers and sellers at a time). I trade closest expiry date contract because my orders execute fast.
How much a trader has to pay for trading Commodity Future Contracts?
For trading Commodity Futures Contracts a trader has not to pay full amount but only a margin amount. Let us take an example of Crude Oil Mega Contract-
Spot price of Crude Oil = ₹ 3,009
Lot Size of Crude Oil Mega Contract= 100 BBL
Value of this contract= 3009 x 100= ₹ 3,00,900
Margin amount required for NRML product= Only ₹ 22,748 (7.57% of value of this contract)
Margin amount required for MIS product = Only 11,374(3.78% of value of this contract)
This 7.57% margin or 3.78% margin amount is not same for all commodities,
but different for different commodities.
What is NRML ?
NRML means Normal. It is a type of a product of Commodity Future Contracts. If we trade this product then our trades or positions will be carrying forwarded to next trading day till the expiry date of the contract. We can square it off before expiry date at any time.
What is MIS ?
MIS means Margin Intraday Square off, it is a type of product of Commodity Future Contracts. If we trade this product then our trades or positions shall be squared off on the same day by us or it will be automatically squared off by the Exchange. It means trades of these products cannot be carry forwarded to the next day.
Advantages and disadvantages of less margin requirements ?
Let us say a trader is having ₹ 3 lakh in his Trading Account and he decides to buy Crude Oil at ₹ 3009. With this amount of money he can buy 13 Lots (amount in account/margin amount required =300000/22778=13 Lots). The value of these 13 lots is ₹ 39, 00,000(approx.). Now, assume after some days price of Crude Oil increase by 10%. Then his profit will be 10% of ₹ 39, 00, 00 i.e. ₹ 3, 90,000. It means by this he gets profit of 130% on his investment. This is the magic of paying only margin amount.
If the price falls by 10%, then he will suffer with loss of ₹ 3, 90,000. This is the disadvantage i.e. this is very risky.
How do I avoid this risk ?
I avoid risk by taking more accurate trades and limiting my position size. My Unique Trading System (UTS) generates less trading signals but more accurate. I have developed a calculator to calculate permitted maximum number of Lots can be traded. This is developed on the basis of some factors of commodities price fluctuations. In my calculator what it is required to enter only the amount I want to invest. To see the calculator you can follow the link.
Commodity and USD-INR Relation
USD means United States Dollar (currency of America) and INR means Indian National Rupees (currency of India). INR keeps fluctuating in respect of USD. On 01 Jan 2015, 1 USD was equal to 63 INR and on 1 Jan 2016 equal to 66 INR. Since, commodities are traded internationally in USD but all commodities are traded in INR in India. That is why; there is a connection between USD/INR and price of commodities in India. Let us take example of ‘x’ commodity.
Case 1- Let’s say 1 USD = 50 INR
Price of ‘x’ commodity = 100 USD / kg
Now, we have to pay to trade this commodity = 100 x 50= 5000 INR
Case 2- Let’s say 1 USD = 75 INR
Price of ‘x’ commodity = 70 USD / kg
Now, we have to pay to trade this commodity = 70 x 5075= 5250 INR
The price of commodity has decreased (from 100 Dollar to 75 Dollar). But, price has increased in terms of INR (from ₹ 5000 to 5250). This is the relation between USD / INR and commodity prices in India.
Commodity News/ Reports and Data
What is best way to get commodity news/ data/ reports?
‘Link’ can be viewed for this purpose. Importance has been divided into Low (one bull face icon), Medium (two bull face icon) and High (three bull face icon).
What are some important periodical reports?
(1) United States crude oil inventories
This report is released on every Wednesday/Thursday at about 8/9 o’clock in the evening. This measure the weekly change in the number of barrels of commercial crude oil held by USA firms. This report will be shown like this-
|Oct 26, 2016||-0.553 m||1.699 m|
(2) Natural gas storage
This report is released on every Wednesday/Thursday at about 8/9 o’clock in the evening. This is also like the above report. This will be shown like this-
|Oct 20, 2016||77 b||73 b||79 b|
How to read these reports?
Price of a commodity moves according to supply and demand. If supply is more, then price may decrease and if supply is less then price may increase. If demand is more, then price may increase and if demand is less the price may decrease. These above reports shows only supply side of the commodity.
To interpret these reports we compare the actual figures with forecast figures. If actual is more than the forecast then the report has the bearish effect(decrease of price) and if actual is less than the forecast then the report has the bullish effect (increase of price).