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How to Trade in MCX
MCX Commodity Basics
- MCX Commodity Future Contract
This is a Lot (bunch of some quantity) of some quantity of a MCX commodity. This MCX Future Contract has an expiry date (like 19 October 2016, it means if investor trade the contract of this expiry date, this contract will be automatically squared off on 19 October 2016). Investor can also square it off himself before expiry date. Different commodity contracts have different expiry dates. MCX Future Contracts can be traded in both the directions i.e. can be sold or bought. It means it is not required to buy before selling the Future Contract.
- What is Square Off ?
It means selling if you have bought or buying if you have sold a MCX Commodity Future Contract. It is called exiting from a running trade.
- Why do we Square Off ?
If we want to book profit or loss, then we have to square off our position. We can square of our position partially also. Let’s say an investor having 5 Lots of Crude Oil. The investor can square off 1,2,3,4 or 5 Lots at a time. Partial square off is done to book profit or loss partially. On expiry date square off will happen automatically.
- Long Trade and Short Trade (or Short Selling)
When a trader buys something, it is called Long Trade and when a trader sell something without buying it, then it is called Short Trade (or Short Selling).
- Stop Loss Order
Stop Loss Order is a buy or sell order, which is placed to limit the loss. It is placed in opposite direction of our position. If a trader is having long trade then sell order will be placed and if a trader is having short trade then buy order will be placed. This order is placed at a trigger price. As the spot price become equal to this trigger price, Stop Loss Order will be executed and trader will be out from his position. Let us say spot price of a commodity is ₹ 100 and we are planning to take risk of 5% then there will be two cases, in first case say trader is having long trade then he will place a Stop Loss Order at ₹ 95 and in second case say trader is having short trade then he will place a Stop Loss Order at 105. These prices ( 95 and 105) are called trigger prices.
- What is a ‘Lot’ ?
Lot is a bunch of some quantity of a commodity. Let us take example; mega contract of MCX Aluminum contains 5000kg quantity. This 5000 kg quantity is called Trading Unit or Lot Size for this Aluminum Future Contract. In this ‘kg’ is called Base Value for this Future Contract. The price of commodity we see in market is for this Base Value only. If in market we see price of Aluminum ₹ 105, it means this is the price of 1kg (i.e. Base Value) quantity of Aluminum. If trader wants to trade commodity then he can only trade whole Lot. We cannot trade 4500kg of Aluminium in Stock Market; we have to trade in multiples of Lot Size only. There are different Lot Size and Base Values for different Commodity Future Contracts. To know the Lot Size and Base Value of Commodity Future Contracts you can follow the link.
- Is there commodity of only single Lot Size ?
No, there are generally two types of Future Contracts for each commodity according to the Lot Size, Mini and Mega Future Contracts. Like for Aluminium Mini Future Contract has Lot Size of 1000 kg. To know the Lot Size of Mini and Mega Future Contracts you can follow the link.
- Is there Future Contracts with only single expiry date ?
No, there are generally four types of Future Contracts for each commodity. Like if we see on 1st October 2016, there will be four Future Contracts with Oct 2016, Nov 2016, Dec 2016 and Jan 2017 expiry dates. The Future Contract of closest expiry date has more volatility (i.e. more buyers and sellers at a time). I trade closest expiry date contract because my orders execute fast.