History of Commodity Trading in India

A commodity is defined as goods for which there is demand in a market, but which is supplied without any differentiation in the market. The commodity market is divided in four segments and from it copper from base metals and petroleum from oils are main fluctuating ones copper fluctuates daily based on global supply and demand. So this can be considered as one of the characteristics of a commodity market good is that its price is determined as a function of its market as a whole.

In commodity market well-established physical commodities is traded actively in intraday or spot market and other one is derivative market. There is another important class of energy commodities which includes electricity, gas, coal and oil. As commodities were things of value, of uniform quality, that were produced in large quantities by many different producers and the items in commodity market from each different producer were considered equivalent and traded on commodity exchange, it is based on standard stated contract that defines the commodity, not any quality inherent in a specific producer’s product. Commodity is mainly traded on a commodity exchange and the list of some main exchanges are as follows:

Chicago Board of Trade.

Chicago Mercantile Exchange.

London Metal Exchange.

New York Mercantile Exchange.

Multi Commodity Exchange.

National commodity Derivative Exchange.

If we talk of commodity market in context of India then the Multi Commodity Exchange (MCX) and National Commodity Derivative Exchange (NCDEX) are the main. Now we are going to talk over the main points of trading strategies to be laid in commodity market. The commodity market deals with four segments and trading in commodity will surely prove profitable if traded with strategy. Trading strategies to be followed in Commodity market:

1) In commodity market the trader should follow a strategy after checking their risk tolerance, comfort levels, knowledge of the markets. Doing this will clear your mind in case of risk tolerance that up to which amount of loss you can tolerate.

2) In commodity trading you can also follow “Trend Following” strategy that most of the professional traders use and recommend. The strategy says that the prices that are in a trend have a higher probability of continuing in that direction. Therefore, the odds should be in your favor by taking trades in the direction of the trend.

3) You also have a choice you can follow “Range Trading” when markets is not in a trend. In commodity markets range trading strategy, you would sell the commodity to market when it gets to the top of its range and buy it from the market when it gets to the bottom of its range. This strategy can work very well for a long period of time, but you have to be careful when the market breaks out of its ran. The person who is Trading in commodities can use these strategies and can grab profit. But first you has to have some knowledge of market you can also take help of advisory firms which provide commodity tips and MCX tips over the market.

 

[Swaswati Borpuzari]

Commodity trading in India has a rich and extensive history that dates back to ancient times, reflecting the country's long-standing role as a major global trading hub. The Indus Valley Civilization, which flourished around 3000 BCE, engaged in trade with Mesopotamia and other regions, exchanging goods such as spices, textiles, and precious metals. This early trade laid the foundation for a complex economic system that would evolve over the centuries.

During the medieval period, the Indian subcontinent became a key player in the spice trade, with ports like Calicut and Surat serving as vital nodes in the international trade network. The arrival of the Arab and European traders further catalyzed the growth of commodity trading, as they sought Indian spices, textiles, and other goods to meet the demands of their home markets. The establishment of the British East India Company in the 17th century marked a significant turning point, as it facilitated large-scale trade and eventually led to the colonial exploitation of India's resources.

In the 19th century, the British colonial administration introduced formal commodity exchanges, such as the Bombay Cotton Trade Association (1850) and the Calcutta Hessian Exchange (1875), which were precursors to modern commodity exchanges. These institutions standardized trading practices and provided a platform for the exchange of agricultural and industrial commodities. The introduction of railroads and telegraph lines during this period also improved the efficiency of commodity trading by connecting remote regions to major markets.

Post-independence, India's commodity trading sector underwent significant changes. The government implemented policies to regulate and control trade, aiming to stabilize prices and ensure fair trade practices. However, these regulations often led to inefficiencies and market distortions. In the 1990s, with the onset of economic liberalization, the Indian government began to relax these controls, leading to the revival of commodity exchanges and the emergence of new trading platforms.

The turn of the 21st century saw the establishment of modern commodity exchanges such as the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX), which have revolutionized the way commodities are traded in India. These exchanges offer a wide range of products, from agricultural commodities like wheat and rice to precious metals and energy resources. They have also introduced electronic trading systems, which have increased transparency and efficiency in the market.

Today, India's commodity trading sector is a dynamic and integral part of the national economy, reflecting the country's diverse agricultural and industrial landscape. The sector continues to evolve, driven by technological advancements and increasing global integration. Despite challenges such as price volatility and market regulation, commodity trading in India remains a crucial mechanism for risk management and price discovery, supporting the livelihoods of millions of farmers and traders across the country.

 

[Dhruv Bindhani]

A commodity is defined as a good for which there is demand in a market, but which is supplied without any differentiation. This means that, regardless of the producer, the commodity is considered to be of uniform quality and equivalent, and is traded based on a standard contract rather than any specific brand or producer's inherent quality.

Characteristics of a Commodity Market Good:​

• Undifferentiated: Items from different producers are considered equivalent.
• Standardized Contracts: Trading occurs based on standard contracts that define the commodity.
• Price Determined by Market as a Whole: The price of a commodity is a function of its entire market's supply and demand. For example, copper and petroleum are known for daily price fluctuations based on global supply and demand dynamics.
• Traded on Exchanges: Commodities are primarily traded on specialized commodity exchanges.

Commodity Market Segments:​

The commodity market is typically divided into four main segments, although the text doesn't explicitly list all four, it highlights key categories:

• Base Metals: e.g., copper
• Oils/Energy: e.g., petroleum, electricity, gas, coal
• Agricultural Products: (implied by the Indian exchanges' focus)
• Precious Metals: (implied by exchanges trading gold and silver)

Types of Commodity Trading Markets:​

1. Intraday or Spot Market: Where well-established physical commodities are traded actively for immediate delivery.
2. Derivative Market: Involves trading contracts like futures and options, which derive their value from the underlying physical commodity.

Major Commodity Exchanges:​

Globally, some of the main commodity exchanges include:

• Chicago Board of Trade (CBOT)
• Chicago Mercantile Exchange (CME)
• London Metal Exchange (LME)
• New York Mercantile Exchange (NYMEX)

In India, the two main commodity exchanges are:

• Multi Commodity Exchange (MCX): Primarily focuses on metals (precious and base) and energy products (like crude oil and natural gas). It is the largest commodity exchange in India by trading volume.
• National Commodity & Derivatives Exchange (NCDEX): Primarily specializes in agricultural commodities like cereals, pulses, and spices.

Trading Strategies in the Commodity Market:​

To trade profitably in the commodity market, especially given its fluctuating nature, strategic approaches are crucial:

1. Assess Risk Tolerance and Knowledge: Before adopting any strategy, a trader must evaluate their personal risk tolerance, comfort levels, and understanding of the markets. This helps in determining the maximum acceptable loss.
2. Trend Following Strategy: This is a popular strategy used by many professional traders. The principle is that prices moving in a particular direction (an established "trend") have a higher probability of continuing in that direction. Therefore, traders aim to take positions in the direction of the trend to increase their odds of success.
3. Range Trading Strategy:This strategy is employed when the market is not exhibiting a clear trend, meaning prices are moving within a defined range. In range trading, a trader would:
   • Sell the commodity when its price reaches the top of its established range (resistance level).
   • Buy the commodity when its price falls to the bottom of its established range (support level).This strategy can be effective for extended periods in sideways markets, but traders must be cautious of potential "breakouts" where the price moves decisively beyond the defined range, as this can lead to significant losses if positions are not adjusted.

Traders in commodities can utilize these strategies to generate profit. However, it's essential to possess a fundamental understanding of the market. Seeking guidance from advisory firms that provide commodity tips and MCX tips can also be beneficial for those new to the market or looking for expert insights.