Understanding the Commodities Market

[gaurishh]

Initiating a thread for better understanding the commodities market. Why is this important ? Understanding who trades in a market, how, when and why can be used to provide for large profits.

For example, there are systems used in the index based futures market based on how MMs can influence opening price. Another great example of using market structure is exploiting stop cascades and option barrier hunts in the currencies.

An understanding of how a market works is critical. Hypothetical example being if price discovery never takes place in a index futures market, it would be useless to trade S&R in that market. You could only benefit by taking signals from the underlying stocks in such case.

I do have a bit of information on how price discovery takes place on the MCX and will post my ideas if there is enough interest.

A few questions for discussion now
1. Who are the largest players in the various precious metals ?
2. How do the largest arbitrageurs work ( MCX prices vx. international prices)?
3. For commods where does price discovery happen ? Spot or futures? Which one leads?
4. How do commercials use the MCX?

 

[vssoma]

dear gaurishh,
please, proceed....

 

[gaurishh]

A learning experience

I have a amusing little story to tell - something that happened to me some time ago when I just started in the markets and taught me to be sceptical of my knowledge at all times. This is a vital key to trading which is an area dominated by false probabilities, misleading systems and fake gurus.

When I had just begun trading I wanted to find some simple edge in the forex market. Coincidentally I began looking for action at certain times of the day / week - I was hooked by an explosion in activity on Mondays.

I began to notice that for almost a year previously the pound (maybe euro, I forget) would have one sided action (either long or short) on Mondays. You could place an entry say 20 ticks ( pips) from the open and use a 20 tick stop loss and close out by NY open / EOD based on PA for about a 120 tick profit. This looked at first glance as an insanely profitable system. Trades worked out in profit about 40% of the time and with a huge RR I began dreaming of the millions that would follow.

On deeper introspection and looking at more extensive past data my dreams were shattered. First going back 5 years or more I could see that the expectancy was much lower. Most of these breakouts were related to other market reasons that I understood much later.

Moral of the story and post : Any system must be based on provable market mechanics. I see a great number of threads based on MAs and combinations of indicators. System developers ferret out back testing and probability results to claim that their systems work but very few can explain why. Unless the why behind a system can be explained it is dangerous to use it. A system based on concrete market mechanics is far safer to play.

That moral and what I learned long ago is why this thread has originated. BTW try out the Monday experiment on your favourite instrument - you would be surprised

A point to be noted - I wish this thread to be a discussion and would love to see inputs from more experienced and learned traders. I am and always will be a noob at trading.

A question for discussion - at what point does a futures trader puke on average? Is it one day into a drawdown? Is it two days? Is it three days? How would this end up contirbuting to TA. Would say a 3 day pyschological barrier end up contributing to a known candle pattern Hint Hint..... Just another poke into thinking on what lies behind all that PA

Another one - how does a stop cascade happen? Why would so many puke at the same price point ? Is this something that can be exploited?

 

[gaurishh]

You're right. Do not trade without a good understanding of the markets, specially a hard market like commodities. You are doing a good work. Keep it on!

Apologies for the delay in continuing this thread. I find it tough to meet work commitments and also contribute intelligently on a forum ( attribute this to a loss of IQ due to age )

Its critical to think of this aspect for a simple reason. On certain days / times orderflow in market is very one-sided. You can scale into position until you are proven wrong by the market. For example each of my trades end up risking 2-3 % of capital and I might make 4-5 such entries at times of one sided order flow. I stop trading for the day if I take even a single loss - why? Because my reason for trading is negated. This is markedly different than someone who says that taking multiple losses is ok since I have this MA crossover method that has a 60% chance of 1:1.
How is this system different than other systems that we mostly read of? Simple - one is based on hard market facts - the other is based on statistical hope.
Now how do we know that a day / time period / price point is going to see substantially one sided flow ? Thats all you need isnt it
Took me a long time to understand this.
BTW, most people who have been doing this for long enough can sometimes predict very accurately what order flow will look like for a commodity on a given day. Me , I am just a noob who rides his luck. I hope and dream of learning these things one day.
On that puke point - its called puke point since some traders actually throw up under pressure. Insanely tough and heartbreaking business isnt it? I would never advise my daugher to take up trading as a profession.
Humm, what do you guys think of that ? Can it be basis for a system? When do bulls/bears just give up ?

 

[xception]

can u recommend me some books or sites where i can learn about commodity market n trading

 

[gaurishh]

can u recommend me some books or sites where i can learn about commodity market n trading

Assuming you are very new ( and not asking for how do I trade as in give me a TA system)

1. Understand your broker terminal, order types etc.
2. Always work with stop losses for your trades.
3. Open up your terminal and just paper trade for a few days with the commods and index futures. Different instruments have different charachteristics. Some will attract you more than others. You are not trying to be profitable while paper trading. This phase is just to get you acquainted with the order types, market basics and lasts but a few days. You can google the rest.
4. Now for the selected instrument spend time understanding how it works. Look at major players and try understanding how they trade.
5. Look at market functions ( e.g. pre-opening).
6. Find some event or reason which causes substantially one sided order flow. Back test a little to ensure that you have been right (if your edge can be back tested).
7. Now start on the minis with say 20K capital ( Gold M will cost about 7K to trade).
8. After 3 months profitable add more money and repeat regularly provided you consistently win (every month is profitable). Keep doing this until you hit capacity to trade standard lots on gold / your instrument of choice. Work with single standard lots for about 1 year. You would need about 100K to handle standard lots comfortably ( gold margin is about 75K).The one year gives you time to get a feel for the market and make silly mistakes ( like forgetting stop losses).
9. Your edge MIGHT disappear after some time. An example would be the patch last year that plugged a liquidity loophole on a currencies server which allowed for outrageous fills ( deep positive slippage). So you must keep learning.
10. This way of finding entry edges ( structure based) is very different from TA. You can replace point 6 if you are lured by TA and indicators. Use whatever meets your fancy.

Remember that no one in the market will truly hand you a strong system or on a silver platter on any forum(which I think might be your question in the future). You need to take responsibility for your trading and search for your edge. Wether that is TA or FA or OF/MS based is dependent on your maturity. Ask yourself what is the underlying reality of the market? Ask wether any system truly exploits an underlying market factor. Take a popular system on this or any forum and understand after the first few postings what part of the market is exploited.

Here is a simple example of finding something in the underlying market reality and exploiting it. Let us assume for a minute that you know of a major options barrier in the market. The market is 30 ticks from the strike. You see a pin form on a low TF ( 5 min) . What does that mean?
Does it mean that the Defenders overextended? In which case you can simply join in breaking the barrier and liquidate into the defense stops.

BTW, in case you do find a meaningful entry idea the bulk of your efforts then go into exits. Once you have both and can trade well with single lots you keep adding capital till you hit a liquidity problem or feel uncomfortable with the size of trades you take, e.g. Most people I know find it harsh to trade beyond 10 cars on gold even though the account size might allow them say 30 or 40 cars.

Trading is a lond and rewarding journey. Do enjoy, it really has very precious little to do with money. The fun disappears when you know how to trade. It just gets a little mundane once you hit that point.You are at the most exciting and enjoyable part. The next few years will reveal a great deal to you about yourself.

BTW, you would do well to speak with someone who trades / has traded at large investment banks / trading houses / pits. I am not speaking of any small retail trader.

BTW, excepting a rare minority most books are not very useful.

One more thing, I am a noob. If you are a TA guru or hobbyist you are welcome to have at me. I would love to learn from you.

 

[smartboy1jan1982]

Excellent advice for newbies like me. :thumb:

Thank you for sharing your experience with us gaurishh. :clapping:

 

[ram548]

Assuming you are very new ( and not asking for how do I trade as in give me a TA system)

1. Understand your broker terminal, order types etc.
2. Always work with stop losses for your trades.
3. Open up your terminal and just paper trade for a few days with the commods and index futures. Different instruments have different charachteristics. Some will attract you more than others. You are not trying to be profitable while paper trading. This phase is just to get you acquainted with the order types, market basics and lasts but a few days. You can google the rest.
4. Now for the selected instrument spend time understanding how it works. Look at major players and try understanding how they trade.
5. Look at market functions ( e.g. pre-opening).
6. Find some event or reason which causes substantially one sided order flow. Back test a little to ensure that you have been right (if your edge can be back tested).
7. Now start on the minis with say 20K capital ( Gold M will cost about 7K to trade).
8. After 3 months profitable add more money and repeat regularly provided you consistently win (every month is profitable). Keep doing this until you hit capacity to trade standard lots on gold / your instrument of choice. Work with single standard lots for about 1 year. You would need about 100K to handle standard lots comfortably ( gold margin is about 75K).The one year gives you time to get a feel for the market and make silly mistakes ( like forgetting stop losses).
9. Your edge MIGHT disappear after some time. An example would be the patch last year that plugged a liquidity loophole on a currencies server which allowed for outrageous fills ( deep positive slippage). So you must keep learning.
10. This way of finding entry edges ( structure based) is very different from TA. You can replace point 6 if you are lured by TA and indicators. Use whatever meets your fancy.

Remember that no one in the market will truly hand you a strong system or on a silver platter on any forum(which I think might be your question in the future). You need to take responsibility for your trading and search for your edge. Wether that is TA or FA or OF/MS based is dependent on your maturity. Ask yourself what is the underlying reality of the market? Ask wether any system truly exploits an underlying market factor. Take a popular system on this or any forum and understand after the first few postings what part of the market is exploited.

Here is a simple example of finding something in the underlying market reality and exploiting it. Let us assume for a minute that you know of a major options barrier in the market. The market is 30 ticks from the strike. You see a pin form on a low TF ( 5 min) . What does that mean?
Does it mean that the Defenders overextended? In which case you can simply join in breaking the barrier and liquidate into the defense stops.

BTW, in case you do find a meaningful entry idea the bulk of your efforts then go into exits. Once you have both and can trade well with single lots you keep adding capital till you hit a liquidity problem or feel uncomfortable with the size of trades you take, e.g. Most people I know find it harsh to trade beyond 10 cars on gold even though the account size might allow them say 30 or 40 cars.

Trading is a lond and rewarding journey. Do enjoy, it really has very precious little to do with money. The fun disappears when you know how to trade. It just gets a little mundane once you hit that point.You are at the most exciting and enjoyable part. The next few years will reveal a great deal to you about yourself.

BTW, you would do well to speak with someone who trades / has traded at large investment banks / trading houses / pits. I am not speaking of any small retail trader.

BTW, excepting a rare minority most books are not very useful.

One more thing, I am a noob. If you are a TA guru or hobbyist you are welcome to have at me. I would love to learn from you.

hi first of all thanks for your advice for the new traders can you please tell me the news events which will affect most the base metals prices i am also new to trading i want to start with goldM,copper,leadM,zincM not all of these i will select one commodity from this after knowing about the base metal price factors.
thanks in advance.

 

[OneIndia]

Well. if we trade as per news, its no use, because, before we get news, mcx get that and move the rate,

so news will not help much,

I advice, if your new intraday trader, try book very less profit first,

Example :- in Gold try to book only 20points, in crude oil try to book only 5 to 6 points only

if you need any update, reply here or send me a message,

 

[jassujith]

For a newbe like me how we will be able to know the entry and exit points in certain comds and energy Could you kindly tell me that