What is the commodity market?
Commodity Market is about the trading of precious metals, energy, oil, and spices. Based on the input of demand and supply, buyers and sellers conduct trading on the commodity. Instead of trading physical commodities traders can trade in the commodity exchange setup by Multi Commodity Exchange of India Limited (MCX). The timings for commodity trading are from 10:00 am to 11:55 pm for all the non-agricultural commodities and 10:00 am to 5:00 pm for agricultural commodities
Margin Requirements in Commodity Market
One of the features of the commodity market is trading with margin. Margin is the minimum amount of capital that must be available in your account for you to trade. Think of margin as collateral that allows you to buy or sell. The margin amount are specified for every type of commodity by the exchange.
To help you understand the margin requirements, let us take up one of the most popular commodities which is crude oil.
Suppose a barrel of crude oil costs is Rs. 3900. But you cannot buy one barrel. You need to buy a minimum quantity. The minimum quantity is specified by the exchange. For crude oil minimum quantity is 100 barrels. This minimum quantity to trade is referred to a lot. Hence a cost of a Lot (100 barrels) is Rs. 3.9 lakhs.
The exchange has specified the margin of crude oil. When the price of crude oil is Rs.3900 margins are as below.
Normal Margin (Overnight Trading) = Rs. 47,000 (Approx. 12%)
MIS Margin (Intraday Trading) = Rs. 23,000 (Approx. 6%)
(You need to square off 25 mins before the closing of the market)
A day trader can take advantage of the cover order offered by brokers. In the case of Cover orders, traders get a much higher margin.
A Cover Order is an order which is placed along with a compulsory Stop Loss Order. In a Cover Order, the buy/sell order can be a Limit/Market Order and is accompanied with a compulsory Stop Loss order, in a specified range. This Stop Loss Order cannot be canceled and Stoploss orders define the risk traders are taking per trade.
Stop Loss order is the buy/sell order to limit your loss when the price movement is not in your favor. If your buy price is Rs. 3,900 and you want to take Rs.10 maximum loss your stop-loss order will be Rs.3,890.
Market order is the order to buy/sell at the current market price. The price is not specified at the time of placing the order. The order will get executed at the offer price by other traders.
Limit order is the buy/sell order where you specify the price. When you are buying you don’t want to buy higher than this price. When you are selling you don’t want to sell below this price.
Now consider Buy price = Rs. 3900
Risk Amount = Rs. 10
Stop Loss Order = Rs. (3900-10) = Rs. 3890
Margin Amount: Rs. 5500 (Broker specific. You need to get the margin details from broker where you have the demat account.)
Total Risk Amount = Rs 10*100 = Rs. 1,000
Total Profit = Profit amount * Lot size
For a gain of Rs 20
Profit = Rs.20 * 100 = Rs. 2,000
The Exit Strategy
A good Exit strategy saves you from any major loss.
There is a concept of Moving average(MA) which is one of the very popular technical indicator used for stop loss or calculating risk amount. Many websites offer you free technical charts where you can verify the status of the indicators.
For example in www.investing.com when you set the Plot moving average period to 20, it provides information of the average of last 20 period closing price. In this scenario if you are having a long position (Buy) keep your stop loss at 20 MA and keep changing the stoploss along with change in price of MA. This will protect the profit which you have already earned and work as exit strategy. If change in trend brings down the price to stoploss price the stoploss order will get executed and will save you from loss.
However, when the price of moving average increase along with price of the commodity you should buy. As per above chart, a trader can keep changing the stop loss wait till the price hit stop loss and that’s when you sell.
About The Author
Founder Director at GenYAnalytica Solutions Private Limited.
A Data Science Management consultant with over 23 years of experience in finance domain. He builds and implements Artificial Intelligent Tools in the areas of Stock Trading, Commodities, Forex, etc., He also provides training on
- Technical Analysis of the stock market
- Trading and Investment using Technical Indicator and Machine learning.
- Quantitative Analytics using statistical model
- Portfolio Management
- Risk Management and Risk Optimization
- Algorithmic Trading and Trading System building
- Hedge fund management