Trading in Commodity derivative was first started with setting up of Bombay Cotton Trade Association Limited in 1875. They first started future trading in cotton. Later on groundnut, cotton seeds and castor seeds were added.
On the same lines, Calcutta Hessian Exchange Limited was set up in 1919, for future trading of Jute in Calcutta (now Kolkata)
Things started evolving and trading in wheat, bullion, potato, too came in the picture. At present, future trading is carried out in vegetable oil seeds, oils, pulses, cereals, metals, energy, fibers, etc.
The main aspect of commodity derivative trading consists of two aspects. They are money management and research. One has to have a very solid plan taking into consideration both the aspects.
Certain traders give high importance to money management whereas others give more importance to research. To get best results it is seen that both are to be balanced in right proportion. Both are inter-dependent.
We will talk about both aspects. Money management and research. Both should follow in a disciplined manner.
- Money Management
Money management is one of the important aspects of the commodity derivatives trading business.
A) Time interval of trade
The time interval varies from intraday trading (daily) to short-term (two to three days) to medium term (few days) to long-term (few days to a few months).
This is the first step the trader should decide. And plan how long will he be holding the position. He should stick to the plan accordingly.
B) Funds at risk
Amount of risk he is ready to take on each trade depending on his investments. It can be two to three percent or five percent of his investments. Because longer the time duration of trade higher would be the risk and vice versa.
C) Risk to rewards ratio
Everyone knows higher the risk higher will be the rewards and vice versa. But taking calculated risk rewards can be further extended. That is if three trades are successful and one failed one than it is OK. But since commodity market occasional have trend pattern, in that case, the ratio should be 1:1.5
D) Identifying commodities
One should identify in which one wishes to trade in. Commodities which have a daily trading range of two to four percent should consider.
If the daily trading range of commodity is more than four percent than it will be the high-risk commodity. On the other hand, if trading is less than two percent than it is a very idle commodity. Traders usually avoid slow-moving counters.
After money management research is the second most important factor. The output of good research will provide –
A) Entry and exit points
One of the outputs of good research is that it provides a clearly defined entry point. When a trader should enter in the trade and also for how long should hold and when to exit. Both end of the spectrum that is stop loss and target gain should be considered.
B) To trade or not to trade
An experienced trader will not trade all the times. They usually avoid high volatile days. And also low movements days. This is where most of the money is lost, and risk is high.
Discipline on both the aspects that is money management and research, helps the experienced trader make trading a profitable business. Having a trading plan prepared and sticking to it no matter what may come, is the essential key to successful trading business. Though, in the initial stage of trading business, one may not earn sufficient returns. But in long run, he is sure to earn a good profit and that too steadily. As times go by one enriches his experience and chances of earning regular profit increases.
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