Mcx commodity trading strategies
Anyway, let us get straight to work and discuss Silver. There is a common perception that the market price of gold and silver makes similar moves. We will discuss pair trading in detail, perhaps in a different module altogether. However, let us go ahead and investigate if Gold and Silver move in tandem. I did run a correlation check on Gold and Silver using 30 minutes intraday data for the last 3 months note this is over a data points and here are the results —.
The correlation on an intraday basis is 0. So what does this mean? Well, the correlation suggests that the two metals make similar moves on an intraday basis.
If the intraday correlation is as tight as 0. This will be a kind of hedged strategy as you are long and short on similar assets at the same time. There are lots of other things to take care of when you initiate such trades; more on pair trading at a later point.
If you were to just look at the graph and take a call on how closely the two metals move, then chances are you would disregarded any sort of correlation between them J, but the actual numbers paints a completely different picture! Longer term data will portray more meaningful information.
In fact, I dug up the correlation data between silver and gold from a recent survey by Thomson Reuters, and here is what they suggest —. The correlations are broken down on a quarterly basis clearly a longer term approach here and as you can see the correlation between Gold and Silver is on average is about 0. The tight EOD correlation implies that traders and investors consider both gold and silver as safe havens in times of economic crisis. This further implies that any global geo political tensions tend to drive the price of not just gold, but silver as well.
Also, please do note the correlation of Silver with Oil, it is quite erratic and gives a sense on unreliability here. Silver has applications in industrial fabrication, photography, fashion, electrical, and electronics industries. Hence, there is always a demand for silver. Historically, the demand for silver has grown at roughly 2.
Out of the total global demand, bulk of it comes from industrial fabrication and manufacturing. This directly suggests that the price of silver is kind of influenced by growth of manufacturing and industrial economies such as China and, to some extent, India. On the supply side, global mining production along with scarp and sovereign sales stands at The supply has not really improved over the years; in fact the data suggests that the growth in supply has just been about 1.
You can read the complete survey report. Given how the supply and demand scenario plays out, there is a lot of scope to trade silver as a commodity. This leads us back to the most important question — who decides the rate of silver? Well, silver rates are fixed the same way as that of gold, in London, by a pool of participating banks. There are four variants of silver contracts that are available for you to trade on MCX. They differ mainly in terms of contract value, and therefore the margin required.
These contracts are as follows —. Let us begin with the main Silver contract. The price quotation for the Silver contract is 1 kilogram. This means when you check the price of Silver on MCX or on your trading terminal, the price that you see is for 1 kg of silver.
This price includes the import duties, taxes, and all the other applicable duties. Have a look at the screenshot below taken from Kite —. The current price of Silver December Future is Rs. Since the contract is for 30 kgs lot size , the contract value will be —. As far as the contracts expiries are concerned, here are the set of contracts that are available to trade as of now as of Oct , note all contracts expire on the 5 th of the contract month —.
When the December contract expires, the December contract gets introduced to the market. You must be aware by now that the most liquid contract to trade would be the one which has the closest expiry date. Do recall, settlement in equities is always in cash and not physical. This means if you hold 10 lots of Silver and you opt for delivery then you will get delivery on kg of Silver. In order to get the delivery of the commodity, one has to express his intention to do so.
This has to be done any time before 4 days to expiry. So given that the expiry is on 5th, one has to express his intent to take delivery anytime on or before the 4th 1st, 2nd, 3rd, 4th. If you are trading with Zerodha, note that we do not allow you to get into the physical delivery of commodities. So you will be forced to close the position before 1st of the expiry month. In fact, I personally prefer to close the positions early on and not really get into the physical delivery of commodities just because of the logistics involved.
Another important point to note here — while the delivery is mandatory for Silver 30 kgs contract, delivery is not mandatory for the Silver Mini and Silver Micro contracts. However, you do not have the option to cash settle the Silver 30 kg contract. The table above maps a commodity with a location, for example Silver Micro is mapped to Ahmedabad.
Ever wondered what this really means? We all know that upon expiry, the price of the underlying in the spot market and its futures price converge to a single price point. Now in case of equities, the underlying and its futures are traded on the same platform i. However, in case of commodities there are many different spot markets. For example, Pepper and Rubber are prominently traded in Kochi. Gold is traded in both Mumbai and Ahmedabad and so on. Given this, upon expiry, the futures of Gold should merge with which spot price?
Should it be the one in Mumbai or the one in Ahmedabad? For this exact reason, MCX has mapped each commodity with a spot market, and upon expiry the futures price will converge with the price of the designated spot market. If you are comfortable with the contract details of Silver mentioned above, then it is fairly easy to understand the other silver contracts that are traded on MCX. They vary mainly in terms of the lot size and therefore the margin requirement.
The delivery option helps you decided whether you would like to take delivery of the contract or simply cash settle. As you can see, the margins required are much lesser quite naturally compared to the big silver contract.
As far as trading is concerned, similar to Gold, the Silver Fundamentals are quite complex — tracking them on a day to day basis may not really be possible and in fact is not really required. Most traders I know trade commodities based on technical analysis. I personally think this a much better way to go about active commodity trading.
On the same lines is there a link available which allows us to do the same thing for silver or gold etc. You can now do this with Zerodha Pi. Hi, Thanks for this chapter. Since gold and silver move in same direction. Can I buy gold if a buy signal emerge in silver and same as can I buy silver if a buy signal emerge in gold Sir will it Good to do??
End what is tha last day of expirei month? Glad to hear that. Will be waiting for it. As a commodity trader identify the trend using the cycle theory approach, do the correlation analysis with domestic or any global standard currency. Though the information given by me is half cooked but I have given the hint for all the necessary parameter which you need to do a perfect commodity analysis.
The beta decoupling method also has great success in commodity trading. Must Read Article a. How to use 1SD level to form option strategy? How to do intraday and positional trade using 1SD formula? Covered call option strategy using 1SD formula d. Multiple bull or bear spread using 1SD e. How to profit from the cross calendar option strategy?
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