All trades depend on certain decisions taken even before placing an order. There are three of them that are more important than the view on the price in the commodities market.
First of all, there is the timing decision because the MCX operates from morning to late night, and your strategy should correspond to this schedule. Second of all, there is the size decision. Each contract has its own lot, and this lot defines the cost of each price movement per rupee. Thirdly, there is the capital decision, as you have to block the margin before trading.
Any mistake can make a minor trade a costly one. Below you will find how these decisions are taken.
When can you trade commodities in India?
The Multi Commodity Exchange (MCX) is open Monday to Friday. Gold, silver, and crude oil futures can be traded from 9:00 AM to 11:30 PM, including up to 11:55 PM during the period of US daylight savings. Contracts for agriculture are closed earlier in the day.
There is a reason behind the late closing time. Indian prices follow international benchmarks. Therefore, New York starts its working day just when we are having our evening meal. That is why you should expect the most interesting moves after 7:00 PM.
During some exchange holidays, MCX normally operates in two trading sessions. The morning session remains closed between 9:00 AM and 5:00 PM, while trading can be done only in the evening session from 5:00 PM to 11:30 PM, or 11:55 PM during US daylight saving time.
There are some holidays when both sessions remain closed, and such information is released by the exchange at the beginning of each year. Diwali is an exception. An hour-long Muhurat trading session is conducted by MCX in the evening session, whose timings are announced a few days before.
What does one lot really mean?
Gold contracts can be found in such variations as 1 kg, 100 grams Gold Mini, 8 grams Guinea, and 1 gram Petal. Silver is offered in contracts of 30 kg down to 1 kg Micro. There are 100 barrels of crude oil futures and 10 barrels of Mini. Natural gas is 1,250 mmBtu.
The lot size determines the cost of every tick you see on the chart. In the case of gold, the price is quoted per 10 grams. So, ₹100 growth impacts a Gold Mini lot by ₹1,000.
How much margin should you block?
The question arising from that ₹1,000 fluctuation in one lot is how much money is required to own it. That is called margin. It is not the price of the contract. Rather, it is an amount deposited with the broker as a guarantee.
Margin consists of two elements. SPAN margin is an estimate of the maximum possible loss in one day, while the exposure margin is an additional cushion.
For example, if the Gold Mini lot is priced at ₹10,00,000, then a SPAN margin of 4% and exposure of 1% would require a margin of ₹50,000.
At the end of each day, the contract is marked to market. Thus, if gold prices fall by 1%, you will incur a loss of ₹10,000, and the cushion becomes ₹40,000. To avoid squaring off the position due to a shortage of funds, it is better to have some extra money in the account, preferably equal to the margin itself.
The figures of 4% and 1% are just illustrative examples; please verify the current SPAN and exposure ratios on MCX before publishing this essay.
How should you place your first trade?
Now, put together the three aspects we considered. Start with the mini or micro lots, so that in case of a mistake, you will be able to limit your losses. Calculate the margin and place the stop loss before you make the position.
Try to avoid holding any position on days when there will be key reports, such as US inflation or OPEC meetings, when the price could jump up or down within seconds.
Also, commodity options could be a good choice. While selling options, you risk only the premium of the contract. A good options trading platform displays the premium and margin level before you confirm the order.
The speed of execution is important too. In case of sharp movements on the crude oil market, the fastest trading platform provides you with a better fill than slower alternatives.
Conclusion
The proper set-up for the first trade should start with the clock. Next, the lot size will determine the amount of price action you have to trade, while the margin will determine how much money you need to tie up in trading it. Start with small amounts, calculate your margin before each trade, and have some more funds for settlement.=