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Summer Training Report

On

“Commodities Trading in Share Khan with the application


of Technical Tools & Technique”

AT

SHAREKHAN Ltd.

Bhubaneswar
Prepared By
Mr. RAJESH MOHAPATRA
Roll No. 08FC125
Batch 2008-10
Under the Guidance of

Mr.Anand Agarwal (Relationship Manager) Prof. A.K. Mishra


(Company Guide) (Internal Guide)

As a Partial Fulfilment of PGDFC Programme of IMIS

INSTITUTE OF MANAGEMENT & INFORMATION SCIENCE


BHUBANESWAR

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DECLARATION

I’m Rajesh Mohapatra, a student of Institute of Management & Information


Science, which is approved by AICTE, hereby declare that the project
entitled “ Commodities Trading in Share Khan with the application of
Technical Tools & Technique ” at SHAREKHAN Ltd., Bhubaneswar is
the original work done by me and the information provided in the study is
authentic to the best of my knowledge. This study report has not been
submitted to any other institution or university for the award or any other
degree.

This report is based on my personal opinion hence cannot be referred to


legal purpose.

Date: Signature

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ACKNOWLEDGEMENT

Preservation, inspiration and motivation have always played a key


role in the success of any venture. In the present world of competition and
success, training is like a bridge between theoretical and practical working;
willingly I prepared this particular Project. First of all I would like to thank
the supreme power, the almighty god, who is the one who has always guided
me to work on the right path of my life. I would like to thank Mrs. Sabitri
Nanda (Branch Manager) for granting me permission to undertake the
training in their esteemed organization.
I express my sincere thanks to Prof. (Dr) S.P Padhi (Area chair,
Finance), Prof A.K Mishra (Internal Guide) & others faculty members
for the valuable suggestion and making this project a real successful.

I also thanks to Mrs. Sabitri Nanda (Branch Manager), Mr. Anand


Agarwal (Relationship Manager) (External Guide) for their time-to-time
guidance and support in completing the project. I also thank the other staff
members of SHAREKHAN LTD who devoted their valuable time by
helping me to complete my project.

Last but not least, my sincere thanks to my parents and friends who
directly or indirectly helped me to bring this project into the final shape.

Rajesh Mohapatra

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EXECUTIVE SUMMARY

This project has been a great learning experience for me; at the same
time it gave me enough scope to implement my analytical ability. This
project as a whole can be divided into two parts:
The first part gives an insight about the Commodities Trading and its
various aspects. It is purely based on whatever I learned at SHAREKHAN.
One can have a brief knowledge about Commodities Trading and all its
basics through the project. Other than that the real servings come when one
moves ahead. Some of the most interesting questions regarding
Commodities have been covered. Some of them are: How does the trade
take place? What makes commodities special? All the topics have been
covered in a very systematic way. The language has been kept simple so that
even a layman could understand.
The second part consists of the description of the various
statistical tools that are used by the research teams & expert individual
investors to predict the market & earn profit. The data collected has been
well organized and presented. Hope the research findings and conclusions
will be of use. It also describes the uniqueness and features of SHARE
KHAN.

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CONTENTS

DECLARATION I
ACKNOWLEDGEMENT II
EXECUTIVE SUMMARY III
CHAPTER -1
 INTRODUCTION 5–6
 OBJECTIVE
 METHODOLOGY
CHAPTER -2
 OVERVIEW OF THE 7 - 10
INDIAN SECURITIES
MARKET
CHAPTER -3
 TRADING PRACTICES 11 - 16
IN INDIA
CHAPTER -4
 ONLINE SHARE 17 - 23
TRADING
CHAPTER -5
 SETTLEMENT SYSTEM 24 - 29
CHAPTER -6
 COMPANY PROFILE 30 - 36
CHAPTER -7
 MAJOR COMPETITORS 37 - 57

CHAPTER -8
 COMPARATIVE 58 - 59
ANALYSIS
CHAPTER -9
 CONCLUSION
 SUGGESTION
 BIBILOGRAPHY
CHAPTER -10

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CHAPTER-I
INTRODUCTION

The vast geographical extent of India and her huge population is aptly
complemented by the size of her market. The broadest classification of the Indian
Market can be made in terms of the commodity market and the bond market.

The commodity market in India comprises of all palpable markets that we


come across in our daily lives. Such markets are social institutions that facilitate
exchange of goods for money. The cost of goods is estimated in terms of domestic
currency. Indian Commodity Market can be subdivided into the following two
categories:

 Wholesale Market

 Retail Market

The traditional wholesale market in India dealt with the whole sellers who
bought goods from the farmers and manufacturers and then sold them to the
retailers after making a profit in the process. It was the retailers who finally sold
the goods to the consumers. With the passage of time the importance of whole
sellers began to fade out for the following reasons:

o The whole sellers in most situations, acted as mere parasites that did not
add any value to the product but raised its price which was eventually bear
by the consumers.

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o The improvement in transport facilities made the retailers to directly
interact with the producers and hence the need for whole sellers was not
felt.

In recent years, the extent of the retail market (both organized and
unorganized) has evolved in leaps and bounds. In fact, the success stories of the
commodity market of India in recent years has mainly centered on the growth
generated by the Retail Sector. Almost every commodity under the sun both
agricultural and industrial is now being provided at well distributed retail outlets
throughout the country.

Moreover, the retail outlets belong to both the organized as well as the
unorganized sector. The unorganized retail outlets of the yesteryears consist of
small shop owners who are price takers where consumers face a highly
competitive price structure. The organized sector on the other hand is owned by
various business houses like Pantaloons, Reliance, Tata and others. Such markets
are usually selling a wide range of articles such as agricultural and manufactured,
edible and inedible, perishable and durable. Modern marketing strategies and
other techniques of sales promotion enable such markets to draw customers from
every section of the society. However the growth of such markets has still
centered on the urban areas primarily due to infrastructural limitations.
The share of retail trade in the country's gross domestic product (GDP) was
between 8–10 per cent in 2007. It is currently around 12 per cent, and is likely to
reach 22 per cent by 2010. A McKinsey report 'The rise of Indian Consumer
Market', estimates that the Indian consumer market is likely to grow four times by
2025. Commercial real estate services company, CB Richard Ellis' findings state
that India's retail market is currently valued at US$ 511 billion. India's overall
retail sector is expected to rise to US$ 833 billion by 2013 and to US$ 1.3 trillion
by 2018, at a compound annual growth rate (CAGR) of 10 per cent.

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OBJECTIVES OF THE STUDY

The basic purpose of undertaking this project was:

I. To study the working of commodities market in detail.


II. To know the application of various technical & statistical tools.
III. To be able to foresee the future prospects.

SCOPE

As the project report is fully based on personal learning & observation it


can be used to have detailed knowledge about the working of Commodity Market.
Also the report can be used for decision making by a customer whether to go for
Commodity futures Trading or not?

LIMITATIONS

I. The study is based on historical data.


II. An attempt has been made to predict the future of market which may not
come true.
III. The commodity market in India is in its infantry stage.

METHODOLOGY
The data required for the study has been collected mainly through primary
and secondary sources. The secondary data is collected from the existing sources
that are newspapers, magazines, journals and from various websites. Primary data
is collected through personal interaction with the traders & professional experts
who are really experienced in this market. The method adopted for collection of
data is according to the convenience of mine.

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CHAPTER-II

A Brief History of future Markets

In the 1840s, Chicago had become a commercial center with railroad and
telegraph lines connecting it with the East. Around this same time, the
McCormick reaper was invented which eventually lead to higher wheat
production. Midwest farmers came to Chicago to sell their wheat to dealers who,
in turn, shipped it all over the country.

Farmers brought their wheat to Chicago hoping to sell it at a good price. The city
had few storage facilities and no established procedures either for weighing the
grain or for grading it. In short, the farmers were often at the mercy of the dealer.

1848 saw the opening of a central place where farmers and dealers could meet to
deal in "spot" grain - that is, to exchange cash for immediate delivery of wheat.

The futures contract, as we know it today, evolved as farmers (sellers) and dealers
(buyers) began to commit to future exchanges of grain for cash. For instance, the
farmer would agree with the dealer on a price to deliver to him 5,000 bushels of
wheat at the end of June. The bargain suited both parties. The farmer knew how
much he would be paid for his wheat, and the dealer knew his costs in advance.
The two parties may have exchanged a written contract to this effect and even a
small amount of money representing a "guarantee."

Such contracts became common and were even used as collateral for bank loans.
They also began to change hands before the delivery date. If the dealer decided he
didn't want the wheat, he would sell the contract to someone who did. Or, the
farmer who didn't want to deliver his wheat might pass his obligation on to
another farmer the price would go up and down depending on what was happening

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in the wheat market. If bad weather had come, the people who had contracted to
sell wheat would hold more valuable contracts because the supply would be
lower; if the harvest were bigger than expected, the seller's contract would become
less valuable. It wasn't long before people who had no intention of ever buying or
selling wheat began trading the contracts. They were speculators, hoping to buy
low and sell high or sell high and buy low.

THE FUTURES CONTRACT

Unlike a stock, which represents equity in a company and can be held for a long
time, if not indefinitely, futures contracts have finite lives. They are primarily used
for hedging commodity price-fluctuation risks or for taking advantage of price
movements, rather than for the buying or selling of the actual cash commodity.
The word "contract" is used because a futures contract requires delivery of the
commodity in a stated month in the future unless the contract is liquidated before
it expires.

The buyer of the futures contract (the party with a long position) agrees on a fixed
purchase price to buy the underlying commodity (wheat, gold or T-bills, for
example) from the seller at the expiration of the contract. The seller of the futures
contract (the party with a short position) agrees to sell the underlying commodity
to the buyer at expiration at the fixed sales price. As time passes, the contract's
price changes relative to the fixed price at which the trade was initiated. This
creates profits or losses for the trader.

In most cases, delivery never takes place. Instead, both the buyer and the seller,
acting independently of each other, usually liquidate their long and short positions
before the contract expires; the buyer sells futures and the seller buys futures.

Arbitrageurs in the futures markets are constantly watching the relationship


between cash and futures in order to exploit such mispricing. If, for example, an

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arbitrageur realized that gold futures in a certain month were overpriced in relation
to the cash gold market and/or interest rates, he would immediately sell those
contracts knowing that he could lock in a risk-free profit. Traders on the floor of
the exchange would notice the heavy selling activity and react by quickly pushing
down the futures price, thus bringing it back into line with the cash market. For
this reason, such opportunities are rare and fleeting. Most arbitrage strategies are
carried out by traders from large dealer firms. They monitor prices in the cash and
futures markets from "upstairs" where they have electronic screens and direct
phone lines to place orders on the exchange floor.

Why Futures Prices Change?

The cost of carry explains the basic relationship of cash to futures pricing, but it
does not explain many less certain factors that can affect futures pricing such as
seasonal influences and other unpredictable events.

As for Interest-rate and currency futures - those based on T-bonds, T-bills,


Eurodollars and the five major currencies - the biggest influences are the policies
and trading activities of the Federal Reserve, U.S. Treasury and foreign central
banks, all of which affect interest rates.

Stock indexes are affected by whatever influences the stock market as a whole.
Interest rates certainly play a major role - higher interest rates usually hurt the
stock market. Other effects include the overall prospects for corporate earnings
and corporate tax policies that help or hurt big business.

Futures trading provide a way to establish a form of price knowledge leading to


continuous price discovery. Futures prices reflect not only current cash prices, but
also expectations of future prices and general economic factors.

CHAPTER-III
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COMMODITY

A commodity may be defined as an article, a product or material that is


bought and sold. It can be classified as every kind of movable property, except
Actionable Claims, Money & Securities. Commodities actually offer immense
potential to become a separate asset class for market-savvy investors, arbitrageurs
and speculators. Retail investors, who claim to understand the equity markets,
may find commodities an unfathomable market. But in fact commodities are easy
to understand as far as fundamentals of demand and supply are concerned. Retail
investors should understand the risks and advantages of trading in commodity
futures before taking a leap. Historically, pricing in commodity futures has been
less volatile compared with equity, thus providing an efficient portfolio
diversification option.
In fact, the size of the commodities markets in India is also quite
significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion),
commodities related (and dependent) industries constitute about 58 per cent.
Currently, the various commodities across the country clock an annual turnover of
Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the
size of the commodities market grows many folds here on.

A cash commodity must meet three basic conditions to be successfully


traded in the futures market:

I. It has to be standardized and, for agricultural and industrial commodities,


must be in a basic, raw, unprocessed state. There are futures contracts on
wheat, but not on flour. Wheat is wheat (although different types of wheat

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have different futures contracts). The miller who needs wheat futures
contract to help him avoid losing money on his flour transactions with
customers wouldn't need flour futures. A given amount of wheat yields a
given amount of flour and the cost of converting wheat to flour is fairly
fixed & hence predictable.

II. Perishable commodities must have an adequate shelf life, because delivery
on a futures contract is deferred.

III. The cash commodity's price must fluctuate enough to create uncertainty,
which means both risk and potential profit.

COMMODITY MARKET

The Commodity Trading Market of established itself in India as a dominant


market form much before the 1970s. In fact, in the last phase of 1970s, the
commodity trading market of India started to loose its' vibrancy. This happened
because, from the late 1970s, numerous regulations and restrictions started to be
introduced in the commodity market of India and these restrictions were acting as
obstacles in the path of smooth functioning of the commodity trading market.

In the recent years, many restrictions, which were negatively affecting commodity
trading market, have been removed. So, now the commodity trading market of
India has again started to grow in a fast pace. Commodity market is an important
constituent of the financial markets of any country. It is the market where a wide
range of products, viz., precious metals, base metals, crude oil, energy and soft
commodities like palm oil, coffee etc. are traded. It is important to develop a
vibrant, active and liquid commodity market. This would help investors hedge

13
their commodity risk, take speculative positions in commodities and exploit
arbitrage opportunities in the market.

STRUCTURE OF COMMODITY MARKET

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Ministry of
Consumer Affairs

FMC (Forwards
Market Commission)

Commodity
Exchange

National Exchange Regional Exchange

20 other regional
NCDEX MCX NMCE NBOT
exchanges

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SPOT MARKET

Quality
Certificatio
Hedger
Warehouses n Agencies
(Exporters /
Millers
Industry)

Clearing Producers
Bank Commodities (Farmers/Co
-
Ecosystem
operatives/In
MCX stitutional)

Transporter
s/ Traders
Support (speculators)
agencies Consumers
arbitrageurs/
(Retail/
client)
Institutional)

GLOBAL COMMODITIES
MARKET

DIFFERENT TYPES OF COMMODITIES TRADED

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World-over one will find that a market exits for almost all the commodities
known to us. These commodities can be broadly classified into the following
groups:

Aluminium, Copper, Lead, Nickel, Sponge


METAL Iron, Steel Long (Bhavnagar), Steel Long
(Govindgarh), Steel Flat, Tin, Zinc

Gold, Gold HNI, Gold M, i-gold, Silver,


BULLION Silver HNI, Silver M

Cotton L Staple, Cotton M Staple, Cotton


FIBER S Staple, Cotton Yarn, Kapas

Brent Crude Oil, Crude Oil, Furnace Oil,


ENERGY Natural Gas, M. E. Sour Crude Oil

SPICES Cardamom, Jeera, Pepper, Red Chilli


Arecanut, Cashew Kernel, Coffee
PLANTATIONS (Robusta), Rubber
PULSES Chana, Masur, Yellow Peas

PETROCHEMICALS HDPE, Polypropylene(PP), PVC

Castor Oil, Castor Seeds, Coconut Cake,


Coconut Oil, Cotton Seed, Crude Palm Oil,
Groundnut Oil, Kapasia Khalli, Mustard
Oil, Mustard Seed (Jaipur), Mustard Seed
OIL & OIL SEEDS (Sirsa), RBD Palmolein, Refined Soy Oil,
Refined Sunflower Oil, Rice Bran DOC,
Rice Bran Refined Oil, Sesame Seed,
Soymeal, Soy Bean, Soy Seeds

CEREALS Maize

Guargum, Guar Seed, Gurchaku, Mentha


OTHERS Oil, Potato (Agra), Potato (Tarkeshwar),
Sugar M-30, Sugar S-30

CHAPTER-IV

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TURNOVER OF INDIAN COMMODITY EXCHANGES

Indian Commodity Futures Market (Rs Crores)

Exchanges 2004 2005 2006 2007

Multi
Commodity
165147 961,633 1,621,803 2,505,206
Exchange
(MCX)
NCDEX 266,338 1,066,686 944,066 733,479

NMCE(Ahma
13,988 18,385 101,731 24,072
dabad)

NBOT(Indore
58,463 53,683 57,149 74,582
)

Others 67,823 54,735 14,591 37,997


All
571,759 2,155,122 2,739,340 3,375,336
Exchanges

DIFFERENT SEGMENTS IN COMMODITIES MARKET

The commodities market exits in two distinct forms namely the Over the
Counter (OTC) market and the Exchange based market. Also, as in equities, there
exists the spot and the derivatives segment. The spot markets are essentially over
the counter markets and the participation is restricted to people who are involved
with that commodity say the farmer, processor, wholesaler etc. Derivative trading
takes place through exchange-based markets with standardized contracts,
settlements etc.

REGULATORS

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Each exchange is normally regulated by a national governmental (or semi-
governmental) regulatory agency:

Country Regulatory agency


Australian Securities and
Australia
Investments Commission

China Securities Regulatory


Chinese mainland
Commission

Securities and Futures


Hong Kong
Commission
Securities and Exchange Board
India of India and Forward Markets
Commission (FMC)
Securities and Exchange
Pakistan
Commission of Pakistan

Monetary Authority of
Singapore
Singapore

UK Financial Services Authority

Commodity Futures Trading


USA
Commission

Malaysia Securities Commission

LEADING COMMODITY MARKETS OF INDIA


The government has now allowed national commodity exchanges, similar
to the BSE & NSE, to come up and let them deal in commodity derivatives in an
electronic trading environment. These exchanges are expected to offer a nation-
wide anonymous, order driven; screen based trading system for trading. The
Forward Markets Commission (FMC) will regulate these exchanges.
Consequently four commodity exchanges have been approved to commence
business in this regard. They are:

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Commodity Market
S.NO.
in India
Multi Commodity Exchange
1
(MCX), Mumbai
National Commodity and
2 Derivatives Exchange Ltd
(NCDEX), Mumbai
National Board of Trade (NBOT),
3
Indore

National Multi Commodity


4
Exchange (NMCE), Ahmadabad

CHAPTER-V

BENEFITS TO INDUSTRY FROM FUTURES TRADING

 Hedging the price risk associated with futures contractual commitments.

 Spaced out purchases possible rather than large cash purchases and its
storage.

 Efficient price discovery prevents seasonal price volatility.

 Greater flexibility, certainty and transparency in procuring commodities


would aid bank lending.

 Facilitate informed lending.

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 Hedged positions of producers and processors would reduce the risk of
default faced by banks. * Lending for agricultural sector would go up with
greater transparency in pricing and storage.

 Commodity Exchanges to act as distribution network to retail agri-finance


from Banks to rural households.

 Provide trading limit finance to Traders in commodities Exchanges.

BENEFITS TO EXCHANGE MEMBER

 Access to a huge potential market much greater than the securities and cash
market in commodities.

 Robust, scalable, state-of-art technology deployment.

 Member can trade in multiple commodities from a single point, on real


time basis.

 Traders would be trained to be Rural Advisors and Commodity Specialists


and through them multiple rural needs would be met, like bank credit,
information dissemination, etc.

WHY COMMODITY FUTURES?

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One answer that is heard in the financial sector is "we need commodity
futures markets so that we will have volumes, brokerage fees, and something to
trade''. We have to look at futures market in a bigger perspective -- what is the role
for commodity futures in India's economy?

In India agriculture has traditionally been an area with heavy government


intervention. Government intervenes by trying to maintain buffer stocks, they try
to fix prices, and they have import-export restrictions and a host of other
interventions. Many economists think that we could have major benefits from
liberalization of the agricultural sector.

In this case, the question arises about who will maintain the buffer stock, how will
we smoothen the price fluctuations, how will farmers not be vulnerable that
tomorrow the price will crash when the crop comes out, how will farmers get
signals that in the future there will be a great need for wheat or rice. In all these
aspects the futures market has a very big role to play.

If we think there will be a shortage of wheat tomorrow, the futures prices will go
up today, and it will carry signals back to the farmer making sowing decisions
today. In this fashion, a system of futures markets will improve cropping patterns.

Next, if I am growing wheat and am worried that by the time the harvest comes
out prices will go down, then I can sell my wheat on the futures market. I can sell
my wheat at a price, which is fixed today, which eliminates my risk from price
fluctuations. These days, agriculture requires investments -- farmers spend money
on fertilizers, high yielding varieties, etc. They are worried when making these
investments that by the time the crop comes out prices might have dropped,
resulting in losses. Thus a farmer would like to lock in his future price and not be
exposed to fluctuations in prices.

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The third is the role about storage. Today we have the Food Corporation of India,
which is doing a huge job of storage, and it is a system, which -- in my opinion --
does not work. Futures market will produce their own kind of smoothing between
the present and the future. If the future price is high and the present price is low,
an arbitrager will buy today and sell in the future. The converse is also true, thus if
the future price is low the arbitrageur will buy in the futures market. These
activities produce their own "optimal" buffer stocks, smooth prices. They also
work very effectively when there is trade in agricultural commodities; arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using
foreign spot markets.

In totality, commodity futures markets are a part and parcel of a program for
agricultural liberalization. Many agriculture economists understand the need of
liberalization in the sector. Futures markets are an instrument for achieving that
liberalization.

WHAT MAKES COMMODITY TRADING ATTRACTIVE?

o A good low-risk portfolio diversifier

o A highly liquid asset class, acting as a counterweight to stocks, bonds and


real estate.

o Less volatile, compared with, equities and bonds.

o Investors can leverage their investments and multiply potential earnings.

o Better risk-adjusted returns.

o A good hedge against any downturn in equities or bonds as there is

o Little correlation with equity and bond markets.

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o High co-relation with changes in inflation.

o No securities transaction tax levied.

CHAPTER-VI

The NCDEX System

Every market transaction consists of three components i.e. trading, clearing


and settlement. A brief overview of how transactions happen on the NCDEX’s
market.

TRADING

The trading system on the NCDEX provides a fully automated screen based
trading for futures on commodities on a nationwide basis as well as online
monitoring and surveillance mechanism. It supports an order driven market and
provides complete transparency of trading operations. Order matching is essential
on the basis of commodity, its price, time and quantity. All quantity fields are in
units and price in rupees. The exchange specifies the unit of trading and the
delivery unit for futures contracts on various commodities. The exchange notifies
the regular lot size and tick size for each of the contracts traded from time to time.
When any order enters the trading system, it is an active order. It tries to finds a
match on the other side of the book. If it finds a match, a trade is generated. If it
does not find a match, the order becomes passive and gets queued in the respective
outstanding order book in the system. Time stamping is done for each trade and
provides the possibility for a complete audit trail if required. NCDEX trades
commodity futures contracts having one month, two month and three month
expiry cycles. All contracts expire on the 20th of the expiry month. Thus a
January expiration contract would expire on the 20th of January and a February

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expiry contract would cease trading on the 20th of February. If the 20th of the
expiry month is a trading holiday, the contracts shall expire on the previous
trading day. New contracts will be introduced on the trading day following the
expiry of the near month contract.

CLEARING

National Securities Clearing Corporation Limited (NSCCL) undertakes


clearing of trades executed on the NCDEX. The settlement guarantee fund is
maintained and managed by NCDEX. Only clearing members including
professional clearing members (PCMs) only are entitled to clear and settle
contracts through the clearing house. At NCDEX, after the trading hours on the
expiry date, based on the available information, the matching for deliveries takes
place firstly, on the basis of locations and then randomly, keeping in view the
factors such as available capacity of the vault/warehouse, commodities already
deposited and dematerialized and offered for delivery etc. Matching done by this
process is binding on the clearing members. After completion of the matching
process, clearing members are informed of the deliverable/ receivable positions
and the unmatched positions. Unmatched positions have to be settled in cash. The
cash settlement is only for the incremental gain/loss as determined on the basis of
final settlement price.

SETTLEMENT

Futures contracts have two types of settlements, the MTM settlement which
happens on a continuous basis at the end of each day, and the final settlement
which happens on the last trading day of the futures contract. On the NCDEX,
daily MTM settlement and the final MTM settlement in respect of admitted deals
in futures contracts are cash settled by debiting/crediting the clearing accounts of

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clearing members (CM) with the respective clearing bank. All positions of a CM,
brought forward, created during the day or closed out during the day, are market
to market at the daily settlement price or the final settlement price at the close of
trading hours on a day. On the date of expiry, the final settlement price is the spot
price on the expiry day. The responsibility of settlement is on a trading cum
clearing member for all trades done on his own account and his client’s trades. A
professional clearing member is responsible for settling all the participants’ trades,
which he has confirmed to the exchange. On the expiry date of a futures contract,
members submit delivery information through delivery request window on the
trader workstations provided by NCDEX for all open positions for a commodity
for all constituents individually. NCDEX on receipt of such information matches
the information and arrives at delivery position for a member for a commodity.
The seller intending to make delivery takes the commodities to the designated
warehouse. These commodities have to be assayed by the exchange specified
assayer. The commodities have to meet the contract specifications with allowed
variances. If the commodities meet the specifications, the warehouse accepts
them. Warehouse then ensures that the receipts get updated in the depository
system giving a credit in the depositor’s electronic account. The seller the gives
the invoice to his clearing member, who would courier the same to the buyer’s
clearing member. On an appointed date, the buyer goes to the warehouse and takes
physical possession of the commodities.

CHAPTER-VII

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COMPANY PROFILE

ABOUT THE COMPANY


Sharekhan, the retail arm of the SSKI Group offers world-class facilities
for buying and selling shares on BSE and NSE, demat services, derivatives (F&O)

27
and most importantly investment advice tempered by 85 years of research and
broking experience. A research and analysis team is constantly working to track
performance and trends. That’s why Sharekhan has the trading products, which
are having one of the highest success rates in the industry. You can avail of all its
services at any of their 704 share shops across 234 cities, or through internet
using their real time online trading terminals.

A part from Sharekhan, the SSKI Group also comprises of Institutional


Broking and Corporate Finance. The Institutional Broking division caters to
domestic and foreign institutional investors, while the Corporate Finance Division
focuses on niche areas such as infrastructure, telecom and media. SSKI has been
voted as the Top Domestic Brokerage House in the research category, twice by
Euromoney survey and four times by Asiamoney survey. SSKI has been voted the
best domestic brokerage in India by Asiamoney Polls’ 2004
Basically, the company is a market leader in providing brokering services
and has a high turnover in it which makes it No.1 in the market. The main
difference is the services that they provide to the investors. The customer is
managed with a friendly corporate culture to give him a more benefited
investment idea and motivate him whenever he needs. The company is providing
as many tips to the clients (pre-market, online and post-market) for more and more
trading ideas and the manager helps each client to concentrate on a few scripts so
that he can manage the profit/loss.
In future, Sharekhan is planning to enter in Mutual funds, Insurance sector
and banking sector to expand beyond the market currently covered by it. And it
has started MF (Mutual Funds) on priority basis but wants to grow in it.
To sum up, Sharekhan brings a user- friendly trading facility, coupled
with a wealth of content that will help customers stalk the right shares.

28
MISSION STATEMENT

• To provide the best Customer Service and Product Innovation tuned to


diverse needs of clientele.
• Continuous up-gradation with changing technology, while maintaining
human values.
• Respond to progressive globalization and achieving international standards.
• Efficiency and effectiveness built on ethical practices.

CORE VALUES

• Customer Satisfaction through


o Providing quality service effectively and efficiently
o “Smile, it enhances your face value" is a service quality stressed on
o Periodic Customer Service Audits
• Maximization of Stakeholder value
• Success through Teamwork, Integrity and People

BENEFITS OF TRADING WITH SHAREKHAN

• Only Sharekhan offers the facility to trade at two major commodity


exchanges of the country:

1. Multi Commodity Exchange of India Ltd, Mumbai (MCX) and

2. National Commodity and Derivative Exchange, Mumbai (NCDEX).

• Sharekhan also equips you with world-class research, based on technical


and fundamental study of all major commodities.

• What’s more Sharekhan is in the process of launching several trading


products and strategies to help you trade in the commodity futures segment.

Sharekhan is a registered Stock Broker with the Bombay Stock Exchange and
National Stock Exchange to trade on behalf of clients. The screen-based trading is
done on BOLT- BSE Online Trading and NEAT- National Exchange Automated

29
Trading, terminals. There are two types of transactions executed on these
terminals viz. intra-day and delivery based transactions. Intraday transactions are
those, in which the squaring up of deal is done on the same day, while in delivery
based transaction the squaring up is not done on the same day, but the stock is to
be traded on the basis of rolling settlement i.e. T+2. The Brokerage of Intraday
transaction is 0.10% single side, while brokerage on delivery based transactions is
0.50% on both side, i.e. while purchasing as well as selling.

RESEARCH BASED ADVICE TAILORED FOR YOUR


INVESTMENT APPROACH

At Sharekhan we understand that every investor’s needs and goals are


different. Hence we provide a comprehensive set of research reports, so that you
can the right investment decisions regardless of your investing preferences! The
Research and Development at Sharekhan is done at its Head office Mumbai. The
R&D department Head Mr. Hemang Jani forwards all the details regarding all
stocks and scripts to all the branches through Internet. At the end of each trading
day there is a Teleconference, through which the R&D department Head MR.
Hemang Jani talks with each Branch heads and discusses about each day’s closing
position and shows their predictions about next day’s opening position. The
quarries regarding stock positions and other relevant matter of the branch heads of
each branch is being solved through teleconference. The various publications of
Sharekhan viz. Derivatives Digest, Sharekhan’s Valueline, Eagle eye, High Noon,
Investor’s Eye, Commodities Buzz, Commodities Beat, Commodity Trader’s
corner, Sharekhan Xclusive, etc. are being prepared by the research team of
Sharekhan made up of highly experienced people from diverse field.

COMMODITY TRADING IN SHARE KHAN

30
Sharekhan is providing the facility to trade with the commodities through MCX
(Multi-Commodity Exchange) and NCDEX (National Commodities & Derivatives
Exchange). The commodities market in India is an emerging market, which will
become the largest market in the world within the next 5 years, as the trends in the
commodities market shows its performance. The company also provides research
reports on daily, weekly and monthly basis for the investors in the commodities. It
is just like the futures and is having a fixed lot of goods with the margin for each
commodity and the trading is based on the theory of futures and therefore, it is
also called Vayda Market. In short Sharekhan also provides brokering in
commodities and the brokerage charges are 0.10% on total trade value and if carry
forwarded an additional 0.02% charge on total trade.

PRODUCTS OFFERED BY SHAREKHAN

Sharekhan’s products are basically divided into online and offline products.

Off-Line
The Off-Line account is trading account through which one can buy and sell
through his/her telephone or by personal visit at sharekhan shop.

This a/c is for those who are not comfortable with computer and want to trade.

On-Line
The Online trading facilities provided by Sharekhan is basically divided into two
types of accounts, viz. Classic Account and Speed trade Plus and Streamer.

1) CLASSIC ACCOUNT

The CLASSIC ACCOUNT is a Sharekhan online trading account, through which


one can buy and sell shares through our website www.sharekhan.com in an
instant.

31
Along with enabling access for you to trade online, the CLASSIC ACCOUNT
also gives you our Dial-n-Trade service. With this servive, all you have to do is
dial 1-600-22-7050 to buy and sell shares using your phone.

9 Features of the CLASSIC ACCOUNT that enable you to invest effortlessly

1. Online trading account for investing in Equities and Derivatives via


sharekhan.com
2. Integration of: Online trading + Bank + Demat account
3. Instant cash transfer facility against purchase & sale of shares
4. Reasonable transaction charges
5. Instant order and trade confirmation by e-mail
6. Streaming quotes
7. Personalized market watch
8. Single screen interface for cash, derivatives and more

Provision to enter price trigger and view the same online in market watch

2) SPEED TRADE PLUS

SPEEDTRADE PLUS is an internet-based software application that enables you


to buy and sell shares in an instant.

It’s ideal for active traders and jobbers who transact frequently during day's
trading session to capitalize on intra-day price movements.
Speed Trade Plus also provides the features of and functionality of trading in
derivatives from the same single-screen interface.

7 Features of Speed trade Plus that enable you to trade effortlessly

1. Instant order Execution & Confirmation

32
2. Single screen trading terminal

3. Real-time streaming quotes, tic-by-tic charts

4. Market summary (most traded scrip, highest value)

5. Hot keys similar to a brokers terminal

6. Alerts and reminders

7. Back-up facility to place trades on Direct Phone lines

PRICES

Rs.300 Demat A/c charge Deposits will be in Cash or In


Off-Line
+ 10,000 Deposits term of Group A’s Shares
Demat free for 1 year (other
Classic Rs.750 (one time)
facilities included)
Speed Trade Online trading on your pc with
Rs.1,000 (one time)
Plus Demat free and other facilities

CHAPTER-VIII

OPPORTUNITIES IN COMMODITY TRADING

Speculation: Commercial speculation, i.e. speculation by buyers and


sellers of commodities, has been used since the 19th century to enable commodity
traders and processors to protect themselves against short-term price volatility.
Buyers are protected against sudden price increases, sellers against sudden price

33
falls. For commodity buyers and sellers, commercial speculation is a form of price
insurance. Non-commercial speculation takes place not to protect against or
“hedge” price risk, but to benefit by anticipating and “betting long” for prices to
go up or “short” for prices to go down. Non-commercial speculators provide
capital to enable the ongoing function of the market as commercial speculators
liquidate their contract positions by paying for the contracted commodity or
selling the contract to offset the risk of other contract positions held. Non-
commercial speculation is an investment, but one that can overlap with the
interests of agriculture when appropriately regulated.

However, today’s speculation has become excessive relative to the value of the
commodity as determined by supply and demand and other fundamental factors.
For example, according to the FAO, as of April 2008 corn volatility was 30
percent and soybean volatility 40 percent beyond what could be accounted for by
market fundamentals.11 Price volatility has become so extreme that by July some
commercial or “traditional” speculators could no longer afford to use the market
to hedge risks effectively.12 Prices are particularly vulnerable to being moved by
big speculative “bets” when a commodity’s supply and demand relationship is
“tight” due to production failures, high demand and/or lack of supply management
mechanisms.

The futures contract is the fundamental building block from which other
speculative instruments are built. The contract obligates parties to buy or sell a
specified quantity of a commodity at a specified price at an agreed date in the near
future, usually one to three months from the contract date for agricultural
commodities. An options contract does not oblige the parties and costs less to
execute but provides less price protection. Futures and options contracts enable
those who buy and sell commodities to manage short-term price risks and to

34
“discover” the price at which those contracts settle as the due date for fulfilling the
contract approaches.
According to UNCTAD, futures contracts and other “commodity derivatives are
not capable of mitigating the causes of commodity price volatility,” such as failure
to manage structural oversupply of commodities. Failure to regulate commodity
derivatives adequately has not only contributed to huge increases in food import
bills and food insecurity, but also to making futures and options contracts
unavailable or too expensive for many farmers and some agribusinesses to use to
manage price risk.

In the U.S., futures contracts were useful and affordable as long as futures prices
and cash (spot) market prices converged as the date for the contract’s execution
approached. Futures prices helped commodities traders to set a benchmark price in
the cash market. With convergence came some degree of contract predictability
needed to calculate when to buy or sell. Similarly, option contracts, in which
“buyers have the right but not the obligation”15 to buy or sell a commodity at a
specified price at a specified time, relied on price convergence to provide some
contract predictability.

As prices have become more volatile and convergence less predictable since 2006,
the futures market has lost its price discovery and risk management functions for
many market participants.16 According to the FAO, as of March 2008, volatility
in wheat prices reached 60 percent beyond what could be explained by supply and
demand factors.17 “Non-commercial” commodities speculation was a factor,
though not the only one, that impeded price convergence and induced extreme
market volatility, testified the National Grain and Feed Association (NGFA) to
Congress. However, the NGFA and other groups cautioned against over-
regulating the commodities markets, lest there be too little capital in the market to
enable commercial speculators to hedge their risks with futures contracts.

35
Hedging: Hedging in the futures market is a two-step process. Depending
upon the hedger's cash market situation, he will either buy or sell futures as his
first position. For instance, if he is going to buy a commodity in the cash market at
a later time, his first step is to buy futures contracts. Or if he is going to sell a
“cash commodity” at a later time, his first step in the hedging process is to sell
futures contracts.
The second step in the process occurs when the cash market transaction takes
place. At this time the futures position is no longer needed for price protection and
should therefore be offset (closed out). If the hedger was initially long (long
hedge), he would offset his position by selling the contract back. If he was initially
short (short hedge), he would buy back the futures contract. Both the opening and
closing positions must be for the same commodity, number of contracts, and
delivery month.
Basic Commodity Hedging Strategy

We'll assume we are talking about an orange juice producer first. This guy has to
sell his orange juice in six months. The problem is that any price drop in the
orange juice market would have a negative effect on what he can get for his crop
once it's harvested.

He can get around a large part of that risk by establishing a basic short commodity
hedging strategy in the orange juice futures market. This gives him some
protection, sort of like an insurance policy against large price fluctuations.

How to Put on a Short Hedge in Commodity Futures

36
Let's say the current price for orange juice in the cash market on May 1st is 90
cents per pound *fictional.* The OJ grower feels that's a fair price to cover his
costs and make a profit. He also knows that he will have about 15,000 pounds of
OJ to bring to the market at harvest in six months. What he does is sell his crop
now using the futures market to protect that 90 cent sale price in the future.

He goes into the futures market and sells 1 contract *15,000 lbs of OJ* at the
current market price of $1 per pound. Now lets fast forward 1 month into the
future and see how this protects his profit margins.

On June 1st the futures price of OJ had dropped to 70 cents per pound and the
cash or current price for OJ drops to 65 cents per pound because there looks to be
a bumper crop of OJ this year.

Yipes…doesn't look good as The OJ producer needed to get 90 cents a pound to


cover his costs and make a profit. Looks like he won't be buying his kid the GI Joe
with the "Kung Fu" grip because he'll be getting $3750 less for his OJ crop.

The decimal point has been omitted and the calculation looks like this: 9000 -
6500 = 2500 X 1.50 = $3750 loss per contract. But wait…

What about the OJ contract he sold in the futures market? Remember he sold 1
contract at $1 per pound? If he were to buy that contract back right now he would
only have to pay 70 cents a pound. He has a profit of $4500 for the futures
contract.

The decimal point has been omitted and the calculation looks like this 10000 -
7000 = 3000 X 1.50 = $4500 profit per contract.

Now let's analyze what the hedge has done to partially protect the OJ grower's
price risk. The $3750 cash loss is offset by the $4500 profit in the futures market,

37
leaving him with a theoretical profit on the hedging strategy of $750. Not a bad
deal.

Note that the cash price and the futures price didn't fluctuate in tandem. The
reason is that the cash price is influenced by factors such as storage and
transportation costs. They will most likely, but not always follow the same trend
higher or lower, but rarely at the same rate.

Let's go another month into the future. On July 1st another report shows that the
first report overestimated the OJ supply and the price has risen to $1.20 a pound
and the cash price of OJ has gone up to $1.05 because of the simple economics of
supply and demand.

Yippee…..Happy days…The grower can now get $2250 more for his for his OJ.
The calculation looks like this: 10500 - 9000 = 1500 X $1.50 = $2250 more
profit…but hold the phone. He shouldn't run out and buy his wife that new BMW
he promised her just yet. Let's see what happened with the futures contract hedge.

It will cost him $1.20 per pound to buy back the futures contract he sold at $1.
That gives him a loss of $3000 for his futures hedge. The calculation looks like
this: 10000 - 12000 = 2000 X $1.50 = $3000 loss.

Now let's see how the commodity futures hedge has limited his potential profit
margin. The $2250 gain on the cash price of the OJ crop is offset by the $3000
loss he currently has on his commodity futures hedge. The net result of liquidating
the hedge right now would be a loss of $750.

This example shows the importance of maintaining the hedge (regardless of price
fluctuations) until the crop is ready for delivery. The cash price and the futures
price will converge and become almost equal at the expiration month of the

38
futures contract except for costs such as carrying charges (also known as "the
basis").

By liquidating the futures contract and breaking the protection of the hedge before
expiration, the grower then becomes at risk to price fluctuations. He also loses
money on the costs associated with the futures portion of the hedge itself.

How to Put on a Long Hedge in Commodity Futures

The counterpart to the grower and producer is the supplier or processor. In our
example here, the processor will need to buy OJ and process it for consumption or
other uses. Since the processor must make a future purchase, she wants to protect
herself from price increases at the time of delivery.

She will use the futures market as an insurance policy against price risk by putting
on a "Long Hedge" in the futures market by buying futures now, thus locking in
her price plus the cost of placing the long hedge in commodity futures.

We can look at the price variations and how they affect the processor by simply
inverting all the figures from our short hedge example. A rise in the futures price
would be a gain for the processor while a fall in the futures price would be a loss.

A rise in the cash price would be a loss to the processor while a fall in the cash
price would equal a gain. The risk of future price increases is transferred to the
futures market because of the hedge.

There you have it. A basic commodity hedging strategy and how producers and
suppliers use the futures markets to protect price variations and profits. This
strategy is used in all commodity markets from financials to livestock, agricultural
products and even precious metals.

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Is hedging risky?

Hedging is generally not considered risky if it is based on covering short-term


requirements. However, if the hedging party places a wrong bet, then they may
miss out on potential savings. For instance, if a copper manufacturer has a
capacity of 200 tonne and decides to sell 300 tonne on the futures exchange the
remaining 100 tonne is considered as speculation in the market. If prices fall then
he stands to benefit, however if prices go up the 200 tonne he produces can be
delivered on the exchange but he would have to incur losses on the additional 100
tonne.

Arbitrage: Arbitrage refers to the opportunity of taking advantage


between the price difference between two different markets for that same stock or
commodity.

In simple terms one can understand by an example of a commodity selling in one


market at price x and the same commodity selling in another market at price x + y.
Now this y is the difference between the two markets is the arbitrage available to
the trader. The trade is carried simultaneously at both the markets so theoretically
there is no risk. (This arbitrage should not be confused with the word arbitration,
as arbitration is referred to solving of dispute between two or more parties.)

The person who conducts and takes advantage of arbitrage in stocks, commodities,
interest rate bonds, derivative products, forex is know as an arbitrageur.

Arbitrage opportunities exist between different markets because there are different
kind of players in the market, some might be speculators, others jobbers, some
market-markets, and some might be arbitrageurs.

40
The simultaneous purchase and sale of something at different prices sounds like a
purely hypothetical transaction that shouldn't ever exist. But various flavors of
arbitrage or near-arbitrage do exist, offering profits that are attractive compared to
the risk borne by the arbitrageur.

Before the NSE came into existence, the price of the same stock varied across
exchanges. Therefore, it was easy to make money by buying at one exchange and
selling at a higher price on another. But nowadays, with real-time transfer of
information, the difference between the prices of the same stock on different
exchanges is minuscule. That’s why people play more in derivatives and arbitrage
between the price differences in the cash and the futures markets. In the Indian
context arbitrage is largely concentrated in stock futures; index arbitrage is not
very popular as yet.

In the bull market, investors are willing to pay a slight premium to the underlying
cash price in the futures market as they expect the stock to rise in the short term
and are willing to pay the premium (discounts do also happen at times of dividend
and bearishness in the stocks).

Market Makers: True Arbitrage

Arbitrage is being done mostly by market makers because when the difference do
appear, the window of opportunity lasts for only a short time (i.e. seconds or
minutes). That’s why they tend to be executed primarily by market makers who
can spot these rare opportunities quickly and do the transaction in seconds.
Market makers have several advantages over retail traders:
• Far more trading capital
• Generally more skill
• Up-to-the-second news
• Faster computers

41
• More complex software
• Access to the dealing desk
• And more
Combined, these factors make it nearly impossible for a retail trader to take
advantage of pure arbitrage opportunities. Market makers use complex software
that is run on top-of-the-line computers to locate such opportunities constantly.
Once found, the differential is typically negligible, and requires a vast amount of
capital in order to profit. The retail traders would likely get burned by commission
costs. Needless to say, it is almost impossible for retail traders to compete in the
risk-free genre of arbitrage.

Benefits of Arbitrage

1. Risk free investment

The arbitrage is virtually a risk- free product, completely hedged at all times and
hardly impacted by the volatility in the markets. The risk is virtually zero as the
arbitrageur enters into two or more transactions of identical or equivalent
instruments in two or more markets at the same time.

2. Higher returns

The arbitrage product is a better alternative to the investors who have invested
funds in bank fixed deposits, bonds and liquid/ debt funds. In arbitrage products,
one should expect a taxable return of 15-18% per annum (10-12% tax free) as
compared to fixed-income schemes taxable return of 7-8% per annum.

3. Greater flexibility

These products not only provide better returns but also greater flexibility in
respect of lock in period. If returns dip the investor can take his funds back within

42
15-30 days, whereas in Fixed deposits and bonds, lock in period is 5-7 years. In
liquid/ bond funds charges exit loads, which make them unattractive in the event
investor choose to exit.

4. Security
Dealing in arbitrage products is same as shares. It is like a share broking account
where at the end of the day, the investor gets the contract note and bill from the
broker mentioning trades done on his/ her behalf. The investor on a daily basis can
track that how his fund is utilized.

CHAPTER-IX

TECHNICAL TOOLS APPLIED IN COMMODITIES TRADING

The following are the most commonly used tools are implemented by the
brokerage houses & individual investors to predict the commodity futures market
in order to be in a safe position during the trade.

Alpha-Beta Trend Channel


The Alpha-Beta Trend Channel study uses the standard deviation of price
variation to establish two trend lines, one above and one below the moving
average of a price field. This creates a channel (band) where the great majority of
price field values will occur.
Alpha-Beta Trend analysis is an attempt to avoid some of the false signals
associated with crossing moving averages. Three lines are plotted:
• Upper band
• Lower band
• Trading filter
Together, the upper and lower bands define the uncertainty channel for trade

43
decisions; the width of the channel varies with volatility.
Uses:-
The most common uses of the Alpha-Beta Trend are to:
Generate buy and sell signals. If the trading filter moves from within the bands to
below the lower band, this is a signal to buy or enter a long position. If the trading
filter moves from within the bands to above the upper band, this is a signal to sell
or enter a short position.
Determine the trend. If the trading filter lies between the bands, no trend is
indicated. An uptrend is when the trading filter is below the lower band. A
downtrend is when the trading filter is above the upper band.
Bollinger Bands

Bollinger Bands plot trading bands above and below a simple moving average.
The standard deviation of closing prices for a period equal to the moving average
employed is used to determine the band width. This causes the bands to tighten in
quiet markets and loosen in volatile markets. The bands can be used to determine
overbought and oversold levels, locate reversal areas, project targets for market
moves, and determine appropriate stop levels. The bands are used in conjunction
with indicators such as RSI, MACD histogram, CCI and Rate of Change.
Divergences between Bollinger bands and other indicators show potential action
points. As a general guideline, look for buying opportunities when prices are in
the lower band, and selling opportunities when the price activity is in the upper
band.

Candlestick Charts

Method of drawing stock (or commodity) charts which originated in Japan.


Requires the presence of Open, High, Low and Close price data to be drawn.
There are two basic types of candles, the white body and the black body. As with
regular bar charts, a vertical line is used to indicate the periods (normally daily)

44
high to low. When prices close higher than they opened a white rectangle is drawn
on top of the high-low line. This rectangle originates at the opening price level and
extends up towards the closing price. A down day is drawn in black. The
combination of several candles results in patterns (with names like "two crows" or
"bullish engulfing pattern") which give insight into future price activity. For other
Japanese charting approaches also see Renko and Kagi charts.

Commodity Channel Index (CCI)

The CCI is a timing system that is best applied to commodity contracts which
have cyclical or seasonal tendencies. CCI does not determine the length of cycles -
it is designed to detect when such cycles begin and end through the use of a
statistical analysis which incorporates a moving average and a divisor reflecting
both the possible and actual trading ranges. Although developed primarily for
commodities, the CCI could conceivably be used to analyze stocks as well.

Formula: CCI=(M-MAVG)/(0.015xDAVG)

M=1/3 (H+L+C) H=Highest price for a period L=Lowest price for a period
C=Closing price for a period MAVG=N-period simple moving average of M
DAVG= 1/n x SUMi=1 to n (ABS(MI-MAVG))

Commodity Selection Index

The Commodity Selection Index is related to the Directional Movement Index.


Whereas the ADXR plot of the DMI is used to rate contracts from the longer term,
trend-following point of view, the CSI is used to rate items in the more volatile
short term. The Commodity Selection Index takes into account the ADXR from
the Directional Movement Index, the Average True Range, the value of a one cent
move as well as margin and commission requirements. The higher the CSI rating,
the more attractive an item is for trading.

45
Head & Shoulder Pattern

Also can be inverted. A reversal pattern that is one of the more common and
reliable patterns. It is comprised of a rally which ends a fairly extensive advance.
It is followed by a reaction on less volume. This is the left shoulder. The head is
comprised of a rally up on high volume exceeding the price of the previous rally.
And the head is comprised of a reaction down to the previous bottom on light
volume. The right shoulder is comprised of a rally up which fails to exceed the
height of the head. It is then followed by a reaction down. this last reaction down
should break a horizontal line drawn along the bottoms of the previous lows from
the left shoulder and head. This is the point in which the major decline begins. The
major difference between a head and shoulder top and bottom is that the bottom
should have a large burst of activity on the breakout.

MACD (Moving Average Convergence/Divergence)

The MACD is used to determine overbought or oversold conditions in the market.


Written for stocks and stock indices, MACD can be used for commodities as well.
The MACD line is the difference between the long and short exponential moving
averages of the chosen item. The signal line is an exponential moving average of
the MACD line. Signals are generated by the relationship of the two lines. As with
RSI and Stochastics, divergences between the MACD and prices may indicate an
upcoming trend reversal.

Moving Averages

The moving average is probably the best known, and most versatile, indicator in
the analysts tool chest. It can be used with the price of your choice (highs, closes
or whatever) and can also be applied to other indicators, helping to smooth out
volatility. As the name implies, the Moving Average is the average of a given
amount of data. For example, a 14 day average of closing prices is calculated by

46
adding the last 14 closes and dividing by 14. The result is noted on a chart. The
next day the same calculations are performed with the new result being connected
(using a solid or dotted line) to yesterday’s. And so forth. Variations of the basic
Moving Average are the Weighted and Exponential moving averages.

Parabolic (SAR)

The Parabolic is a Time/Price system for the automatic setting of stops. The stop
is both a function of price and of time. The system allows a few days for market
reaction after a trade is initiated after which stops begin to move in more rapid
incremental daily amounts in the direction the trade was initiated. For example,
when a long position is taken the stop will move up regardless of price direction.
However, the distance that the stop moves up is determined by the favorable
distance the price has moved. If the price fails to move favorably within a certain
period of time, the stop reverses the position and begins a new time period.

Price Patterns

Price Patterns are formations which appear on commodity and stock charts which
have shown to have a certain degree of predictive value. Some of the most
common patterns include: Head & Shoulders (bearish), Inverse Head & Shoulders
(bullish), Double Top (bearish), Double Bottom (bullish), Triangles, Flags and
Pennants (can be bullish or bearish depending on the prevailing trend).

RSI - Relative Strength Index

This indicator was developed by Welles Wilder Jr. Relative Strength is often used
to identify price tops and bottoms by keying on specific levels (usually "30" and

47
"70") on the RSI chart which is scaled from from 0-100. The study is also useful
to detect the following:

Movement which might not be as readily apparent on the bar chart

Failure swings above 70 or below 30 which can warn of coming reversals

Support and resistance levels

Divergence between the RSI and price which is often a useful reversal indicator

The Relative Strength Index requires a certain amount of lead-up time in order to
operate successfully.The formula for calculating the RSI is:

rsi=100-(100/1-rs)

rs= average of x day’s up closes divided by average of x day’s down closes

Stochastic

The Stochastic Indicator is based on the observation that as prices increase,


closing prices tend to accumulate ever closer to the highs for the period.
Conversely, as prices decrease, closing prices tend to accumulate ever closer to the
lows for the period. Trading decisions are made with respect to divergence
between % of "D" (one of the two lines generated by the study) and the item's
price. For example, when a commodity or stock makes a high, reacts, and
subsequently moves to a higher high while corresponding peaks on the % of "D"
line make a high and then a lower high, a bearish divergence is indicated. When a
commodity or stock has established a new low, reacts, and moves to a lower low
while the corresponding low points on the % of "D" line make a low and then a
higher low, a bullish divergence is indicated. Traders act upon this divergence
when the other line generated by the study (K) crosses on the right-hand side of

48
the peak of the % of "D" line in the case of a top, or on the right-hand side of the
low point of the % of "D" line in the case of a bottom. Two variations of the
Stochastic Indicator are in use: Regular and Slow. When the Regular plot of the
Stochastic too choppy, the "Slow" version can often clarify the results by reducing
the sensitivity of the calculations. The formula is:

Note: 5 Days is the most commonly used value for %K


%K=100 {(C-L5)/(H5-L5)}

The %D line is a 3 day smoothed version of the %K line


%D=100(H3/L3) where H3 is the 3 day sum of (C-L5) and L3 is the 3 day sum of
(H5-L5)

Volatility

This analysis is based on the idea that stocks bottom from "panic" selling, after
which a rebound is imminent. One way of measuring this phenomenon is to
observe a widening range between high and low prices each day. In general a
progressively wider range, observed over a relatively short period of time, can
indicate that a bottom is near. Price tops are generally reached at a more leisurely
pace and can be characterized by a narrowing of the price range. This measure of
the trading range takes place over a specified period in order to determine whether
or not an issue is being "dumped" and is approaching a bottom. A pre-requisite to
a valid bottom is an increase in the volatility line above the reference line. In a
similar manner, an indication of an imminent top would be a decrease in the
volatility line below the reference line. As long as volatility is rising, in all
probability a stock will not approach a top. It should be noted that this study
should be used in conjunction with trend following analyses and momentum
oscillators for confirmation and accuracy.

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There are many more statistical tools which are applied but during my project I
found these few tools which are mostly used during day trading.

CHAPTER-X
CONCLUSION
Commodity Trading is finding favour with Indian investors and is been seen as a
separate asset class with good growth opportunities. For diversification of
portfolio beyond shares, fixed deposits and mutual funds, commodity trading
offers a good option for long-term investors and arbitrageurs and speculators.
And, now, with daily global volumes in commodity trading touching three times
that of equities, trading in commodities cannot be ignored by Indian investors.
Online commodity exchanges need to revamp certain laws governing futures in
commodities to make the markets more attractive. As a matter of fact, derivative
instruments, such as futures, can help India become a global trading hub for select
commodities. Commodity trading in India is poised for a big take-off in India on
the back of factors like global economic recovery and increasing demand from
China for commodities. Considering the huge volatility witnessed in the equity
markets recently with the Sensex touching 21000 level commodities could add the
required zing to investors' portfolio. Therefore, it won't be long before the market
sees the emergence of a completely redefined set of retail investors.

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