What is Commodity Market?

A commodity market is a physical or virtual marketplace for buying, selling, and trading raw or primary products. Trading can be carried out over the counter or through commodity exchange.

What is a Futures Contract?

A futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other through an order matching system (OMS).  

History of Commodity Market

The evidence says that the commodity market started in Japan in the 17th Century and later, Bombay Cotton Trade Association Ltd in 1875 was formed for commodity derivative in India, and the first American exchange was set up in 1848. It was called the Chicago Board of Trade (CBOT). In Nepal, it has been trading in the commodity market for more than a decade also. Nepal formulated Act and Law regarding the commodity market also but it is still an ongoing process for regulatory aspects.

Example of 5 tops Global Commodity Exchange and their links.

  1. 1.  Chicago Mercantile Exchange (CME)

www.cmegroup.com

London Metal Exchange (LME)

https://www.lme.com/
  1. Multi Commodity Exchange(MCX)
https://www.mcxindia.com/
  1. New York Mercantile Exchange (NYMEX)
https://www.cmegroup.com/company/nymex.html
  1. Tokyo Commodity Exchange (TOCOM)
https://www.tocom.or.jp/index.html

Mechanism/Ecosystem of Commodity Market 

Role of Entity

SEBON: Security Board of Nepal and is a regulator of the commodity market. SEBON has the right to regulate both the stock market as well as the commodity market.

Commodity Exchange: A commodities exchange is a licensed entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products. A commodities exchange also refers to the physical center where trading takes place. The commodities market is massive, trading more than trillions of dollars each day.

Clearing House: A clearinghouse is an intermediary between buyers and sellers of financial instruments. It is an agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.

Broker House: Broker house is also called as a just broker and A broker is an individual or firm that acts as an intermediary between an investor and a securities exchange. A broker can also refer to the role of a firm when it acts as an agent for a customer and charges the customer a commission for its services

Customer: Customer in the commodity market means a trader in a broader sense who executes the trades. Customers can be hedgers, speculators, or arbitragers also.

Analysis

Technical Analysis 

The technical analysis seeks to predict price movements by examining historical data, mainly price and volume. It helps traders and investors navigate the gap between intrinsic value and market price by leveraging techniques like statistical analysis and behavioral economics.

Pivot Point Analysis

A pivot point is a technical analysis indicator, or calculations, used to determine the overall trend of the market over different time frames. … On a subsequent day, trading above the pivot point is thought to indicate ongoing bullish sentiment, while trading below the pivot point indicates a bearish sentiment 

Some Important Indicators:

  • Moving average (MA)
  • Exponential moving average (EMA)
  • Stochastic oscillator.
  • Moving average convergence divergence (MACD)
  • Bollinger bands.
  • Relative strength index (RSI)

Candlestick Analysis:

Candlestick charts are a technical tool that packs data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars, or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. 

Explanation of some important Candlestick 

Fundamental Analysis:

Analysis of the market which is based upon information, news, and data is called Fundamental Analysis. 

Economic Calendar: economic events are announced and see the immediate global market impact – Including previous, forecast which is compiled for specific information is called economic calendar for eg. Forex factory. 

Trading Psychology: Trading psychology refers to the emotions and mental state that help to dictate success or failure in trading commodities. 

Risk and Reward: this is the relationship between the amounts of return gained on an investment and the amount of risk undertaken in that investment. The more return sought the more risk that must be undertaken.

Money Management:

This is the process of maximum utilization of money for investment purposes to get maximum returns by using risk mitigation tools.

Indicators Types:

Leading Indicator: A leading indicator is a piece of economic data that corresponds with a future movement or change in some phenomenon of interest. Economic leading indicators can help to predict and forecast future events and trends in business, markets, and the economy. 

Lagging Indicator: A lagging indicator is a financial sign that becomes apparent only after a large shift has taken place. Therefore, lagging indicators confirm long-term trends, but they do not predict them.

Momentum Indicator: Momentum indicators are tools utilized by traders to get a better understanding of the speed or rate at which the price of a security public SecuritiesPublic securities.

Trend based Indicator: Trend indicators tell you which direction the market is moving in if there is a trend at all. They’re sometimes called oscillators because they tend to move between high and low values like a wave.

RSI: The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

Stochastic Indicator: A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period. The sensitivity of the oscillator to market movements is reducible by adjusting that period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values.

MACD: Moving average convergence divergence (MACD), invented in 1979 by Gerald Appel, is one of the most popular technical indicators in trading. The MACD is appreciated by traders the world over for its simplicity and flexibility, as it can be used either as a trend or momentum indicator.

ROC: The Price Rate of Change (ROC) is a momentum-based technical indicator that measures the percentage change in price between the current price and the price a certain number of periods ago. The ROC indicator is plotted against zero, with the indicator moving upwards into positive territory if price changes are to the upside, and moving into negative territory if price changes are to the downside.

Super Trend Indicator: the super-trend indicator, developed by Olivier Seban, has been popular for helping investors to spot trades (buy and sell) with precision. And the super-trend indicator relies on two fundamental dynamic values- period and multiplier. But before we get into that, it is important to understand the concept of ATR or Average True Range.

Exponential Moving Average: An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average.

Volume: Volume points to the amount of a financial instrument that was traded over a specified time and it is one of the few indicators that is not based on price. High volume points to a high interest in an instrument at its current price and vice versa.