Beginner's Guide to Trading in Commodities - Part 1 | #Learn2Trade Session 9
Welcome to the 9th video of Learn2Trade series I am Vivek Bajaj and I am in the market for sometime now I am seeing passion to learn trading in a lot of people especially youngsters I have started the series after seeing this passion 8 videos are already uploaded and I am teaching basic concepts and building a foundation I hope you must have watched those 8 videos and if you’ve not seen it then watch it first and then watch this 9th video It’s a very interesting series and I’m enjoying it and Annapurna is there with me in this series Hello Sir! How are you? I’m good sir. How are you? I’m good too So I have taught you a lot in those 8 videos I’m putting a lot of effort on you so I want you to give me a trading call eventually That based on your teaching, I like this stock to trade in. When will that time come? Sir hopefully soon. You had explained the sector rotation in the previous video So the watchlist is increasing, so I am spending more time on it In the previous video, we discussed about commodities and recently I was speaking to a friend So he also started trading in commodities and it got me interested so I thought if we can discuss that today Everyone has been interested in commodities in India as gold is very close to our life Gold is the 1st thing that comes to our mind when we talk about commodities It’s interesting to trade in Gold I started out as a commodities analyst after my MBA I believe that I’m a good trader because I started my career from commodities I used to trade in options before my MBA. I earned money as market was inefficient then So my contribution was less in it and market contributed a lot But when I started trading in commodities that’s when I understood what exactly is trading I wanted to teach you commodities as a youngster if you want to make trading a serious career Then it’s not a bad idea to start with commodities as it teaches the game of trading very well You must have studied law of demand in Economics in school and college When the demand goes up, the price also goes up if the supply is constant and vice versa.
The best application of law of demand is in commodities and currency It’s quite distorted in equity as there’s an insider involved Who might act way before without your knowledge There can’t be an insider in commodities or currency as these are widely held instruments Let’s have a small discussion on commodities. What are commodities? Like in the last video you shared that it includes metal like gold, copper and zinc But if you can explain it again So commodities in a very local language is anything that you get from mother nature and which has some utility value Like a stone, it doesn’t have any utility value, so it’s not a commodity From financial market perspective, we can call it a commodity in English Language But it doesn’t have a utility value for us so we don’t But even diamond is a stone and it has a utility value Or gold is a metal and has a utility value, same with copper So anything that we get from mother nature and has a utility value is called a commodity Utility could be for direct or indirect consumption It is direct consumption when we consume directly any agricultural product produced naturally, that’s a commodity Indirect consumption like copper, it’s a metal. You don’t use copper directly but use it to make electronic wires It has an indirect utility Are all the commodities traded in the market? And it’s important to know why is it traded In the last video, I had given the example of a farmer and a mill owner.
Farmer is afraid that the price of his produce will decrease in the future, so he wants to lock that price Mill owner is afraid that the raw material he needs, produced by the farmer. Its price will increase and impact the profit margin Both are talking about the same underlying but the risk involved for both are opposite One’s risk is if the price increases and the other’s risk is if the price decreases So they meet one day and decide to make a contract on a fixed price. This is known as forward contract Deliver wheat on 18th March in exchange for a fixed sum of money. This is forward contract The main role of the commodities exchanges was to find a way to standardize these contracts The dates can vary for everyone, so the exchanges launched futures contract Where the expiry date is fixed all the trades will be as per that day So contracts started forming of daily and monthly contracts What’s the difference between forwards and futures? Forwards is flexible contract and futures is standardized contract. So we talk about futures contract when we say commodity derivative A big exchange in the commodity derivative in India is MCX Where non agri commodities are traded largely And if you talk about non-agri commodities, then there’s an exchange known as MCDEX We will focus on non agri today as the dynamics of agri and non agri are very different So let’s focus on non agri Let’s go to MCX website.
Whenever you want to understand about any contract, the first thing you do is go to exchange website You can see a lot in the MCX website. You might feel a bit complex after seeing this Let’s go to market watch under market data. Let’s see what opens inside this Here you can see the top 20 contracts where gold is a contract of 5th April, Nickel of 31st March Copper on 31st March and silver on 5th May What can you understand from this? That the contracts will expire on that day Gold contract will expire on 5th April and it’s open, low, last traded price and high are given So today, the day of our recording, this contract has gone down by 186, % change is 0.4% Means that from yesterday’s date to today, it’s change is 0.4% This is gold futures contract. Nickel futures contract, Copper futures contract, expiring on these dates
Just like a trading terminal. This is a market watch screen in Exchange’s website You can see these contracts in your trading terminal as well All the brokers give you access to all the contracts on all exchanges I think you’ve opened an account in ICICI, they will have a commodities division You can see MCX in that trading terminal in the dropdown. You can see the gold and silver contract along with the expiry contracts through the dropdown You can download those You only trade in derivatives, when you trade in commodities. You don't trade in cash market Equity is traded in the cash market. It means that if you want to take delivery today, you’re taking it for the day You’ll get after 2 days, there’s T+2 settlement but you can take delivery today There’s no concept of delivery in commodity, from your point of view There is delivery but not for your point of view If you want to trade in commodities, then you trade only in derivatives All these contracts are deliverable contracts that means you might have to take or make delivery if your position stands open on the expiry date You will not wait till the expiry date If it’s going to expire on 5th April; its delivery starts from 1st April. Each contract has a different specification You’ll get to know these on the MCX’s website. They have written about all the products
Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini, Silver Micro Base metal, aluminium, copper, lead. If you pick up any contract For example, let’s pick up fold for ease of our understanding Here you will get the contract specification. You have options contract for gold as well But lets focus on futures for our discussion. Here you’ll get the gold contract specification for February Here you’ll get the gold contract specification for June If you want to know more about gold, they have given a good text to read about it And you can get the contract specification when you click on the contract Whenever you’re planning to trade on something, it’s important to know about it You might want to know the fundamentals and technicals of gold It’s also important to know about the instrument, the gold futures contract Know about the instrument you’re trading in through the exchange’s website There might be changes in the contract which impacts the price and you’re not aware of it Just like an annual report of a company? Absolutely Just like you go through an annual report of a company, it’s important to know the specifications of a contract to trade in it I have used 2 different words. Contract and instrument
If you trade in Reliance on spot, it’s an instrument, but it becomes a contract when traded in derivatives The contract is between the two parties with a specific date to transfer the goods at a specific price You can see Gold, monthly defined. There are a lot information which I will not discuss now as our conversation is trading oriented But it’s important to go through this document before trading in any commodity Let’s go to the core discussion. How do trade in it? As your intention is not to take delivery. Your intention should be intraday or create position for some time Let’s take Gold’s example. I have a question You said trading in commodities is difficult than share market Are the fundamentals and technicals different in commodities? If I’m trading If I’m looking to invest, should I check the fundamentals or technicals? Forget that I said it’s difficult. What I meant was it teaches you a lot as it’s difficult
If you’re starting a career in trading then commodity can be a very good instrument to start as there’s a lot of learning If you go next to equity. Right now everyone wants to enter equity as it’s going up But commodity is a better instrument for base-building of trading than equity You can trade in equity. The biggest advantage is that you can trade in equity from 9:15 to 3:30 And commodity starts from 9 am to 11:30 pm. I’ll tell you the reason behind it. A lot of people trade in equity in the morning, take a break and then trade in commodity in the evening People who don’t have much excitement in their life, get excitement by trading in the market But you shouldn’t as it ruins your social life Let’s have a discussion that if you want to trade in gold, then what should I check before trading Each commodity has its own dynamic. We can have a discussion on each commodity We will discuss each commodity like crude oil, copper. You will understand each commodity
The price movement for each commodity is unique I will give you an overall view but each commodity requires a unique discussion You remember the chart, TradingView. I have created a watchlist named commodity I will start adding the prices of commodity under it. The first commodity if I take gold, then I will search for gold It shows gold TVC. TVC is an international broker and its price which is the gold spot price This is also gold spot price. Barrick gold corporation is a company whose name is Barrick gold This is gold futures which is traded in MCX What is spot price? Like there’s spot and futures in equity Similarly there is a spot price on commodities as well This is a price that people have to deal in if they want to trade today And this is an international price. International market is an open market. Spot market is not one particular market in equity. Like there’s cash market segment in NSE
You can only buy and sell through that or BSE. But the spot market is huge, I can deal with you, the banks are dealing with each other The big gold buyers are dealing with the Bank. This is a market in itself It doesn’t require a marketplace. This is a reference price I am adding the spot market here and gold futures market Futures means the contract that’s being traded Since gold is a global commodity, so there’s a relation between the gold traded in India and globally There can’t be a difference between the path of the gold price in India and the international gold price It should go in tandem as gold is gold. It’s the same gold in India or United States
I have added Gold Spot. Gold futures in the US’s biggest exchange, i.e., COMEX COMEX is the US’s large exchange which is the largest exchange for gold situated in New York I’m adding its futures contract and Gold futures of MCX, which is India’s biggest contract I’m adding its futures contract There was something called mini futures There is a size of contract and mini futures is a small size of contract There is an advantage of commodity market globally that the size of a commodity market is not fixed Here the Nifty is of same size and you have to trade in it. There used to be Nifty money but the regulator has removed it But there are different sizes of contract in commodity. I had shown you in MCX
When you go to products, you can see gold, gold mini, guinea, petal Gold is the largest, mini is smaller, guinea is much more smaller We call guinea, the small one called gold guinea and then petal, it’s the smallest and very thin Different contract size that has different dynamics for delivery If you’re trading in gold mini then you need to take the delivery in gold mini, and delIver in gold guinea if you’re trading in it Let’s stick to gold main now, you will only trade in gold main as it has a lot of activity if you’re risk appetite is low As the value of gold main will be too high and your risk appetite can be low, so maybe you want to start with gold mini whose value is less These are the gold prices. This is spot price. If we see the weekly trend of gold This is the weekly chart of gold spot price. You can see that gold is on down trend I’m not very comfortable with candle stick. We will do a session on candlestick later. Let’s convert it to line now I’ll remove this. What do you understand from this? It’s on weekly down trend
And maybe here. Last time I had told you about demand zone Where can it possibly take a support. It can take a support here This is in dollar terms and this is futures contract trading in comex. Spot is 1715 and futures contract is 1713 Spot and future go together more or less.
This is gold trading in MCX that is 44765. This is the price being traded in MCX Now you can wonder why it’s 1713 and 44765. Maybe because it’s trading more or the volume is high? No This is in dollar terms. 1714 dollar per ounce and this rupee per 10 grams I have another question regarding the volume There is a fixed amount of free float shares in the market. Is it similar here? No Hence the law of economics work better here. There is no limit in gold to trade
There is a limit on Open Interest set by the exchange in India. But that’s a huge limit But there is a limit in the stock as there are limited stocks There is a limit on the number of positions against shares in the derivative as well by the Indian regulator But there is no limit in commodity and hence the law of economics work better there This is gold in dollar terms per ounce and this is gold in rupee terms per 10 gram. It gets converted If we convert the dollar into rupee, we need the rupee rate. So I can say that if the gold falls globally, it’s not necessary that gold will fall in India as well Maybe the fall is not visible due to the impact in rupee as even rupee is being traded I need to track rupee as well. Let’s add USDINR here The rupee is 72, 72. What is Quanda? These are all brokers
The spot trading in the global market can be launched by different brokers Spot trading is not very regulated there. There are small brokers that launch CFDs Which is like a forward contract. Trying to keep it simple and that’s why I am not discussing it in details But the spot trading is not very active in India.
People trade in futures generally which is like a proxy of spot trading When you’re trading in gold, you need to track international prices of gold, rupee movement If you’re trading in gold in India through MCX, then the rupee will impact it as well That conversion factor has to be seen If you’re trading in international gold then dollar influences the gold a lot As internationally gold is in dollar terms. The gold prices will be impacted if the dollar is weak or strong You need to track some basic instruments when you’re trading in commodity How do we track dollar? What is dollar? Currency What will you understand if I ask you that dollar is getting strong? That it’s price is going up. Which price? USD against INR The question should be that the dollar is getting strong vis-a-vis what? Is it getting strong against INR, Euro, Singapore dollars. As there is no meaning to it on standalone We’re used to hearing that dollar is weakening. Dollar is getting weak vis-a-vis INR For someone in Europe, they will think that the Dollar is getting weak against Euro For someone in UK, they will think in GBP terms When we want to track Dollar, we will track against INR, how do we track the global dollar movement if we want to? There’s a concept called dollar index. You will get US Dollar Currency Index when you search for Dollar Index
It’s code is DXY. These are universal codes, the entire world follow these codes Lets add it. So here you have Dollar index which is around 91 right now What is 91? It’s an index which is a composition of multiple currencies Nifty is an index with a composition of how many stocks? 50 Sensex is an index with a composition of? 30 stocks Similarly Dollar index is an index comprised of certain currencies Let’s search which currencies. Components of Dollar index Dollar index is an index formed in the spot market It’s written that Euro is 58%, JPY 13%, GBP 12%.
These currencies of all the developed countries are all combined to create an index known as dollar index Which symbolizes the activities in dollar. The price of that index today is 91 This index is also traded in the Exchange that we can’t access As Indians we are not allowed to trade global markets Whenever we’re talking about tracking the global commodities, then you need to track some global instruments as well As those instruments influence that commodity and even INR is cumulatively influenced by that commodity to form the Indian price It’s classic in the gold’s case. Gold’s price is 1713 there, dollar being a reason behind it If dollar weakens, gold becomes strong and vice versa It’s a relationship which is there since year And if INR becomes strong, then gold will go down in indian rupee terms Gold in dollar terms multiplied by rupee = gold in INR terms If the gold in dollar terms goes up without any change in the rupee. Then the price of gold in INR will increase If the gold in dollar terms goes up and the INR gets strong in indian terms implying dollar gets weak So the gold might remain unchanged in rupee terms It’s important to understand this factor holistically if you want to take a view on Indian gold