Metal and oil hold promise in 2008 - 3

Global movements: Commodities are impacted more by the developments in overseas markets than in equity. Traders are required to keep a constant eye on the movement of commodity prices in global markets.

Broader market sentiments: As usual, traders should keep an eye on the broader market sentiments. They can initiate short or long positions accordingly.

Liquidity: Liquidity is a very broad term used in the market. It broadly indicates the total amount of trade that happened at a counter, number of contracts traded in a particular counter, the spread between the 'buy orders' and 'sell orders', and many more parameters.

Since all the commodities contracts are not very liquid, traders should keep the liquidity aspect in mind before initiating positions. As usual for day traders, brokerage eats into a lot of their profit pie. Since the commodities trading is still in an early stage here, traders should keep a watch on the brokerage applicable to them.

Delivery of contracts: In commodities futures contracts, taking delivery of an underlying commodity is not as simple as taking delivery of stocks.

Metal and oil hold promise in 2008 - 2

Edible oil

According to data released by the Government, there is a possibility of a lower Rabi oilseed crop for 2008 in India. That would mean bullish sentiments for edible oil and related commodities.

Metals (aluminum and steel)

The consumption of metals will continue to be high due to heavy infrastructure development activities in India and China. Therefore, the rates in metals are expected to trade firm in the medium term.

Here are some key points traders should keep in mind while trading in commodities futures:

Discipline: Traders should maintain proper discipline while trading in commodities.

Due to lower margin deposit in the carrying positions in commodities futures, the leverage becomes higher and as a result the potential of profit and loss goes up. Traders are recommended to maintain strict stop-loss and profit targets on their trading positions.

Track market movements: Commodities market is much wider and requires a wide variety of information.

Commodities trading is open for more than 12 hours per day. These factors pose a huge challenge for the traders in the commodities futures market.

Metal and oil hold promise in 2008 - 1

Trading in commodity futures increases the options for market traders. Commodity trades are highly leveraged. The margin requirement for trading in commodity futures is quite low in comparison to the total holding.

As a result, trading in commodities is becoming one of the preferred options for day traders (especially futures of precious metals - gold and silver). Contracts of precious metals and crude are highly liquid and trades in them are quite volatile in nature.

Trading in commodities is on the rise since it was introduced in India in 2003. Today, traders can trade in future contracts of more than 50 commodities.

Precious metals (gold and silver)

Precious metals are used by traders the world over for hedging. There is plenty of scope for further gains in gold and silver prices due to weakness in the dollar, worries over the US and global economy, the ongoing credit crunch and the shaky geopolitical environment. Also, the demand for jewelry has gone up.

Crude oil

Crude oil prices are expected to remain firm in the medium term. The world's oil demand is expected to grow faster than the supply in 2008 as per the forecast from OPEC.