Market Segments Basics Explained
Table of Contents
Market Segments Basics Explained
As you learned in previous article called Market Segments there are 6 segments out of which 4 segments can be officially traded in India. Those are as follows:
- Equity
- Equity Derivatives (Future and Options)
- Currency Derivatives (Future and Options) country-wise
- Commodities Derivatives (Future and Options)
Lets start with Equity.
What Is an Equity Market?
An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy. It gives companies access to capital to grow their business, and investors a piece of ownership in a company with the potential to realize gains in their investment based on the company’s future performance.
Equity markets are the meeting point for buyers and sellers of stocks. The securities traded in the equity market can either be public stocks, which are those listed on the stock exchange, or privately traded stocks. Often, private stocks are traded through dealers, which is the definition of an over-the-counter market.
When companies are born they are private companies, and after a certain time, they go through an initial public offering (IPO), which is a process that turns them into public companies traded on a stock exchange. Private stocks operate slightly differently as they are only offered to employees and certain investors.
Some of the largest equity markets, or stock markets, in the world are the New York Stock Exchange, Nasdaq, Tokyo Stock Exchange, Shanghai Stock Exchange, Bombay Stock Exchange and Euronext Europe.
Companies list their stocks on an exchange as a way to obtain capital to grow their business. An equity market is a form of equity financing, in which a company gives up a certain percentage of ownership in exchange for capital. That capital is then used for a variety of business needs. Equity financing is the opposite of debt financing, which utilizes loans and other forms of borrowing to obtain capital.
Trading in an Equity Market
In India you can trade through NSE or BSE. This article will deal with NSE only though both work the same. In NSE there are more or less 1,800 companies listed are tradeable by public.
The below chart is of State Bank of India which symbol is SBIN.
You can basically see that the lowest quantity traded is 1 Shares x 568.05 = 568.05 but as you can see in the buy window it shows 568.2 which is Total tax & charges included as shown in Price breakup which is 0.68 (Price breakup in above is delayed Screenshot edited and pasted for demonstration purpose).
This is a list of companies listed on the National Stock Exchange of India (NSE). You can trade whatever interests you according to our analysis.
What Is an Index?
An index is a method to track the performance of a group of assets in a standardized way. Indexes typically measure the performance of a basket of securities (stocks) intended to replicate a certain area of the market.
These could be constructed as a broad-based index that captures the entire market, such as the Nifty 50 Index or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment such as Bank Nifty Index, which tracks only Finance stocks.
Nifty 50
The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.
Nifty 50 is owned and managed by NSE Indices (previously known as India Index Services & Products Limited), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. NSE Indices had a marketing and licensing agreement with Standard & Poor’s for co-branding equity indices until 2013. The Nifty 50 index was launched on 22 April 1996, and is one of the many stock indices of Nifty.
The NIFTY 50 index has shaped up to be the largest single financial product in India, with an ecosystem consisting of exchange-traded funds (onshore and offshore), and futures and options at NSE and SGX. NIFTY 50 is the world’s most actively traded contract. WFE, IOM and FIA surveys endorse NSE’s leadership position. Between 2008 & 2012, the NIFTY 50 index’s share of NSE market fell from 65% to 29% due to the rise of sectoral indices like NIFTY Bank, NIFTY IT, NIFTY Pharma, and NIFTY Next 50.
The NIFTY 50 index covers 15 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio.
As of June 30, 2025 NIFTY 50 gives a weightage (Sector Representation) as follows:
| Sector | Weight(%) |
|---|---|
| Financial Services | 37.41 |
| Information Technology | 11.21 |
| Oil, Gas & Consumable Fuels | 10.38 |
| Automobile and Auto Components | 7.03 |
| Fast Moving Consumer Goods | 6.50 |
| Telecommunication | 4.74 |
| Construction | 3.73 |
| Healthcare | 3.60 |
| Metals & Mining | 3.44 |
| Consumer Services | 2.78 |
| Power | 2.55 |
| Consumer Durables | 2.23 |
| Construction Materials | 2.18 |
| Capital Goods | 1.31 |
| Services | 0.93 |
What are constituents?
A constituent is a company whose shares are the part of the index and are used to calculate the index value. The weight that each constituent has on the overall index is based on market capitalisation. Index weight represents the share percentage of constituents in the index. Contribution change measures the contribution of each constituent towards the movements in the index value.
Nifty 50 constituents (stocks sector wise) as of 28 March 2025 are listed here.
Nifty Bank
NIFTY Bank is sectoral index based of finance stocks.
The Nifty Bank Index comprises of the most liquid and large Indian Banking stocks. It provides investors and market intermediaries a benchmark that captures the capital market performance of the Indian banks. The Index comprises of maximum 12 companies listed on National Stock Exchange of India (NSE).
Nifty Bank Index is computed using free float market capitalization method. Nifty Bank Index can be used for a variety of purposes such as benchmarking fund portfolios, launching of index funds, ETFs and structured products.
Nifty Bank constituents as of July 14, 2025 are listed below
| NIFTY BANK Stocks | Index weight 100% |
|---|---|
| HDFC Bank Ltd. | 39.78 |
| ICICI Bank Ltd. | 26.68 |
| Axis Bank Ltd. | 8.82 |
| Kotak Mahindra Bank Ltd. | 8.58 |
| State Bank of India | 8.18 |
| IndusInd Bank Ltd. | 1.49 |
| Federal Bank Ltd. | 1.34 |
| AU Small Finance Bank Ltd. | 1.21 |
| Bank of Baroda | 1.16 |
| Canara Bank | 0.99 |
| Punjab National Bank | 0.90 |
| IDFC First Bank Ltd. | 0.87 |
So now that you know Indices, how do we trade them? We trade them through Futures and Option.
Derivatives – Future & Option (F&O)
Futures and Options are two types of derivatives contracts that derive their value from market movements for the underlying index, security or commodity.
An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
A futures contract obligates the buyer to purchase a specific asset, and the seller to sell and deliver that asset, at a specific future date, unless the holder’s position is closed earlier.
Futures and options positions may be traded and closed ahead of expiration, but the parties to the futures contracts for commodities are typically obligated to make and accept deliveries on the settlement date.
But there are important differences in the rules for options and futures contracts, and in the risks they pose to investors.
Options
There are only two kinds of options: Call options and Put options.
A call option confers the right to buy a stock at the strike price before the agreement expires.
A put option gives the holder the right to sell a stock at a specific price.
Option Simplified
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index). There are only two kinds of options: Call options and Put options.
At the time of agreement(buying an option) the option buyer pays a certain amount to the option seller, this is called the ‘Premium’ amount.
The agreement happens at a pre specified price, often called the ‘Strike Price’. The directional view has to pan out before the expiry date, else the option will expire worthless.
Lot Sizes of Option
Nifty lot size 50
Expiry weekly every Thursday.
BankNifty lot size 15
Expiry weekly every Friday.
Equity (stocks)
Lot size depends on each stock
Expiry monthly last Thursday of month
When market goes up Call increases when market goes down Put increases and vise versa.
Option Chain
Options trade on the open market just as stocks do, however there are additional data points displayed that are specific to options – this is depicted on the option chain. An option chain is utilized by investors to view the pricing and activity of all of the listed options for the selected underlying.
The above image shows option chain of BankNifty of 22 June 2023 Expiry. lets explorer all the terminology in the option chain.
How is the option chain organized?
Calls and Puts : Options chains are normally broken down into two sections, calls and puts. Calls are displayed on the left and puts on the right. Purchasers of call contracts own the right to buy and sellers of call contracts have the obligation to sell. Purchasers of put contracts own the right to sell and sellers of put contracts have the obligation to buy.
Strike Price : The strike price is typically displayed in the center column of the option chain. This is the price at which the put or call can be exercised.
Expiration Date : The option chain is by default sorted by expiration date with the options expiring first at the top. The expiration date will determine how long the contract is in existence. This is sometimes depicted as days to expiration (DTE). The above Option chain chart is 22 June 2023 expiry.
Color Coding : Options that are not highlighted ‘white’ are in-the-money and options that are highlighted ‘brown grey’ are out-the-money.
(Calls are in-the-money when the strike price is below the market price of the underlying. Puts are in-the-money when the strike price is above the market price of the underlying).
The color coding is used to easily see what is in, out, or near (At) the money.
What do all the quote details mean?
Last Traded Price (LTP) : The last price represents the last price at which the option was traded. This could be an opening or a closing transaction. It is important to note that the last time an option was traded could be within seconds, minutes, days, weeks, or even months and may not be an accurate depiction of the current value of the option. The last price in conjunction with the bid and ask is used to quote the value of the option.
Change : The change displays the difference of the last price and previous day’s close.
Bid : The bid represents the best available price that the option can be sold for.
Ask : The ask represents the best available price that the option can be purchased for.
Volume : Volume represents the amount of transactions that have occurred on the current trading day. This figure will update intra-day and is used in conjunction with open interest to determine if the options contract is considered liquid. (Most options do not trade through the extended hours therefore, previous day information may be displayed prior to the market opening) Any option transaction regardless if it is opening or closing will be reflected in the volume.
Open Interest : Open interest shows the amount of contracts in existence for the option. This figure is only updated once a day and will differ from volume. At the end of the trading day all contracts that were closed are subtracted from open interest and all contracts that were open are added to open interest. In short OI indicates the total number of options contracts that are currently open in the market.
Implied Volatility (IV): Implied volatility is an estimate of the future volatility, or fluctuations, of an option’s price. It only forecasts the sizes of potential price swings.
Delta : It measures how much an option price changes for a one-point move in the underlying. Its value ranges between O and 1 for calls.
For put side delta It measures how much an option price changes for a one-point move in the underlying. Its value ranges between l and O for puts
Theta : Theta measures the rate of time value decay and it is always a negative number as time moves in only one direction.
Gamma : It measures the rate of change in the delta. values are highest for at-the-money options and smallest for those far in or out of the money.
Vega : Vega measures the risk from changes in implied volatility. Higher volatility makes options more expensive since there is a greater chance that the underlying security price will move above or below.
Trading the Options
The best and simplest way to trade option is through our strategy as our high probability setups where price from S/R moves drastically one side. The key to be in profit is drastic move cuz any sideways move will decay the price (theta).
The above image shows 3 Expires of BankNifty options dated 22 June, a week later 29 June, and a week later 06 Jul 2023 taken after market closed on 16 Jun 2023. You can see that on 16 Jun market opened at 43583.35 and closed at 43938.15 i.e. BankNifty price raised 354.8 points.
As there was bullish move whole day you can see below the Call OTM (Out the Money) Strike Prices have risen as follows:
- Current expiry 22 June 2023 has increase by 80% than previous day price.
- Next week expiry 29 June 2023 has increase 53% than previous day price.
- 06 July 2023 has increase by 40% than previous day price.
- Most highest increase i.e. 84~88% was at 43,700 and 43,800 strike which is 2 or 3 strike price above the ATM for call (vice versa for Put).
| Strike Price | LTP (22 June 23) | LTP (29 Jun 23) | LTP (06 Jul 23) |
|---|---|---|---|
| 43,500 | 546 (77.30%) | 692 (50.52%) | 809.95 (37.89%) |
| 43,600 | 470 (82.49%) | 612.70 (51.17%) | 725.70 (-51.19%) |
| 43,700 | 393 (84.94%) | 544.55 (53.57%) | 674.20 (41.40%) |
| 43,800 | 325 (88.62%) | 479.25 (53.38%) | 607.65 (40.97%) |
| 43,900 | 255 (83.57%) | 419.70 (55.62%) | 559.35 (46.27%) |
Call OTM Comparison
Bank Nifty LTP is 43.938.15 is ATM or ITM.
| Strike Price | LTP (22 June 23) | LTP (29 Jun 23) | LTP (06 Jul 23) |
|---|---|---|---|
| 44,000 | 234.70 (-60.27%) | 353 (-46.62%) | 447.95 (-39.31%) |
| 44,100 | 287.70 (-56.85%) | 405.85 (-44.34%) | 535.60 (-33.07%) |
| 44,200 | 342.00 (-53.84%) | 458.75 (-42.20%) | 523.95 (-39.96%) |
| 44,300 | 415.20 (-49.73%) | 516.90 (-40.63%) | 629.25 (-33.45%) |
| 44,400 | 487.05 (-47.19%) | 574.60 (-39.16%) | 642.45 (-27.54%) |
Put OTM Comparison
IMPORTANT NOTE
You are free to choose any strike price or tweak the strike price selecting process from this example. The example shown here is the process I use for myself which I concluded doing testing on different strike price on directional price movement.
You should also do the same. Nothing is perfect in trading its Dynamics flow. Even I might tweak my Option Strike selecting process according to my observation.
Because option prices are constantly affected by options Greeks like Delta, Gamma, Vega, Theta and the natural demand supply situation of the markets influence each other. Though all these factors work as independent agents, yet they are all intervened with one another.
Explore more HERE.
Lets look at Call and Put scenarios. Below chart is of Nifty Bank Index Chart where we can see that the resistance has been tested and @14:37 pm there was a pullback entry for up trend. As I have mentioned above for selecting Optimum CALL we have to select 2 or 3 strike below the ATM. The current price at Entry is 43768 which means our strike price for CALL is 43500 of 22 JUN 2023 Expiry.
Nifty Bank Spot Chart
In the above Spot chart price went from 43768.60 to 44060.00 directional movement was fast within 14 min we got 291.4 pts. Below is Current Week Expiry i.e. 22 JUN 43500 CALL. Entry price was 458.05 till 14:52 where price reached 714 that’s 256/- profit in 14 min.
One thing to remember is until you are beginner trade current expiry and switch to next expiry on one day before expiry to next week expiry.
22 JUN 43500 CALL
Below is next week expiry i.e. 29 JUN 43500 CALL here same condition but profit is 238.35/-. As you can see less than current week and market is volatile as there are gaps in candle. Only to enter this expiry a day before current expiry.
29 JUN 43500 CALL
Now below is far week expiry 06 JUL 43500 CALL here profit for same condition is 232.85 less than next week but not that much. As you can witness in below chart there is no volume and volatile market with gaps.
06 JUL 43500 CALL
Now lets look at PUT scenario Entry price of Spot is 44060 which means our strike price is 44200 OTM. Also you can see that the price had lot of resistance going down then up direction plus it took 18 min to get 44060-43840=220 pts. Less Points then up direction but took more time.
Lets look at how our current expiry has performed.
Nifty Bank Spot Chart
As you can see in the below chart we got 154.90/- which is less than the above BN movement so remember for option price to travel greater distance the Spot Price should travel with least amount of resistance and any sideways moment in the trend might slow the option price.
22 JUN 44200 PUT
As Spot price had difficulties that will affect more for Next week expiry as shown below we got 134.15/- for 29 JUN 44200 PUT plus its volatile with gaps in candles.
29 JUN 44200 PUT
The far week expiry with mixture of volatility and less volume it gave 117.10/- option price points for Spot price movement of 220 pts.
Now you know how option trading works which strike to chose with expiry in mind observe various Spot movements and compare option price and tweak this setup process as it seems to fit your psychology.
06 JUL 44200 PUT
That’s it for Option Trading. Lets move to Futures.
Futures
The futures market is regulated by SEBI in India. Lot size is the minimum quantity specified in the futures contract.
What Is Spot Price?
The price at which a stock, currency, or commodity is traded for immediate delivery or settlement is referred to as the spot price. Participants use this price to buy or sell the instruments at any given period of time.
The current or the spot price of the instrument is determined by the level of demand and supply during the current period.
What Is the Futures Price?
The futures price is the one that is mentioned in the futures contract. Usually, this price moves in sync with the spot price of the underlying security. But this price can differ from the spot price in the market due to interest rates, dividends, and time to expiry.
The futures price and the spot price of an asset are different
- Contract value = Lot size times the Futures price
To enter into a futures agreement one has to deposit a margin amount, which is a certain % of the contract value. One lot refers to the minimum number of shares that needs to be transacted.
Once we enter into a futures agreement there is no obligation to stick to the agreement until the contract expires.
Every futures contract has an expiry date beyond which the contact would seize to exist. Upon expiry old contracts cease and new ones are created.
Every futures trade requires a margin amount, the margins are blocked the moment you enter a futures trade. We can exit the agreement anytime, which means you can exit the agreement within seconds of entering the agreement.
Once we square off the futures position, margins are unblocked. The money that you make or lose in a futures transaction is credited or debited to your trading account.
For future buy and future short margin required is same.
What Is Premium In Futures Market:
When the value of a futures contract trades at more amount than the spot price of the underlying on which the contract is based, it is referred to as the Premium. When this phenomenon occurs in any derivatives market, it is referred to as ‘Contango’.
For example, The spot price of gold is trading at Rs. 61000 for 10 grams and the futures contract is trading at Rs. 61500. This means the value of the futures contract is trading at a premium of Rs.500.
The factors that cause a Premium in the futures market:
- Increase in demand for the contract: The expectations of the market participants are one of the factors that cause the futures contract to trade at a premium.
If there are expectations for the price of the underlying asset to increase in the future, more participants will try buying the futures contracts which results in excess demand over the supply. This results in the contract trading at a premium.
- Increase in the cost of storage: Another factor that can cause a premium in the futures contract is the cost of storage. That is the cost incurred to store a particular commodity.
Let us understand this with the help of an example:
Suppose you require a particular commodity that will be deliverable to you in three months. As the commodity is deliverable to you on a future date, you are required to pay the seller for the storage of the commodity which causes a premium in the futures price.
What Is Discount In Futures Market:
When the value of a futures contract trades is lesser than the spot price of the underlying, it is referred to as a discount. When this phenomenon occurs in the commodity derivatives market, it is referred to as ‘Backwardation’’.
For example, The spot price of gold is trading at Rs. 61000 for 10 grams and the futures contract is trading at Rs. 60500. This means the value of the futures contract is trading at a discount of Rs.500.
The factors that cause a discount in the futures market:
- Decrease in demand for the contract: If there are expectations for the price of the underlying asset to decrease in the future, participants will choose alternative options that are safer or that have the potential to give better returns, This decreases the demand for the contract which in turn causes the futures contract to trade at a discount.
- Short-Term Demand spikes: An increase in the demand in the near term can also cause a discount in the futures contract. For instance, there’s a short-term surge in the demand for coffee beans and its demand is expected to return to normal in the future. This will result in the spot price trading at more rate than the futures price.
What Does Premium And Discount In Futures Market Tell You?
When a futures contract is trading at a high premium, it is an indication that the price of the underlying asset may increase in the future. In this situation, one can take a long position in the underlying security.
When a futures contract is trading at a huge discount, it is an indication that the price of the underlying asset may decrease in the future. In this situation, one can take a short position in the underlying security.
Note: The above info should be only used as confluence to our Strategies not standalone.
On the day of expiry the future and spot will always converge.
Examples Of Bank Nifty Futures
Below is BankNifty Index Chart aka Spot Chart for BNF and the Spot price is 43796.50.
BankNifty Index Chart (Spot Chart)
Below is Near Month Expiry chart which is JUN 23 and the price is 43875.10 i.e. Premium of 78.6.
Lot size and brokerage is displayed on order window.
BankNifty JUN Futures
After near month expiry comes Next Month Expiry which is JUL 23 and the price is 44025 i.e. Premium of 228.5.
BankNifty JUL Futures
After next month expiry comes Far Month Expiry which is JUL 23 and the price is 44239 i.e. Premium of 442.5.
BankNifty AUG Futures
Commodities (Derivatives)
A commodity trading market is a marketplace where you can buy, sell and trade in commodities. The commodity trading market can be both physical and virtual (stock exchange).
There are 4 types of commodities which can be traded in a commodity trading market:
- Metals – Gold, Silver, Platinum, Copper etc.
- Energy – Crude oil, Gasoline, Heating gas etc.
- Agriculture – Wheat, Rice, Cocoa, Ragi etc.
- Livestock & Meat – Eggs, Cattle etc.
Commodity trading has been happening in India since ancient times; however, poor government policies, fragmented markets and foreign invasions reduced its popularity.
But with the introduction of exchanges like MCX and NCDEX commodity trading in India is regaining its importance and popularity.
Where does commodity trading take place in India?
There are 4 major commodity trading exchanges in India:
- Multi Commodity Exchange of India, MCX
- National Commodities and Derivatives Exchange Limited, NCDEX
- Indian Commodity Exchange, ICEX
- National Multi Commodity Exchange of India, NMCX
The commodity trading market in India is an electronic trading platform for market participants to buy and sell commodities. The two main commodity trading markets in India:
- Multi Commodity Exchange of India, MCX
- National Commodities and Derivatives Exchange Limited, NCDEX
Both MCX and NCDEX are online commodity exchanges which help market participants to trade in precious metals, agricultural products and energy products.
Types of commodities traded in India on MCX
- Bullion like Gold, Silver, Platinum
- Energy like natural gas, crude oil, gasoline
- Agricultural products like castor seeds, cardamom, black pepper, cotton.
- Metals like lead, zinc, copper, nickel
Complete list of commodities available on MCX to trade; can be found in your brokage calculator.
While, MCX is the largest commodity trading market in India, since 2003, NCDEX has started picking up pace and is currently the largest commodity trading market in India in terms of volume.
But commodity trading is not new in India. The commodity trading market in India has a rich history which dates back to 1875 with the establishment of Bombay Cotton Trade Association.
But a world war, fight for independence and poor government strategy, resulted in stagnant growth of the commodity trading market in India.
But with the establishment of NCDEX, one of the leading commodity exchanges in India, commodity trading has started picking up pace.
NCDEX is a leading agricultural commodity exchange in India with an average daily turnover of Rs 1,18,163.78 Lakhs in 2020, much higher than the Rs 11,318.05 Lakhs in 2003.
The full form of NCDEX is National Commodity & Derivatives Exchange Limited. NCDEX was incorporated as a public limited company on 23rd April 2003 and began operations on 9th May 2003.
NCDEX was recognized as a deemed stock exchange on 28th September 2015 under the Securities Contracts (Regulation Act), 1956.
NCDEX is regulated by SEBI and is headquartered in Mumbai. NCDEX allows trading in 23 commodities; highest across the global commodities market.
Types of commodities traded in India on NCDEX?
The NCDEX allows trading in 23 commodities, highest among all commodity trading markets.
- Cereal & Pulses: Chana, Barley, Bajra, Wheat, Moong, Maize, Paddy(Basmati).
- Fiber’s: Kapas, 29mm Cotton
- Spices: Turmeric, Coriander, Jeera
- Oil & Oil Seeds: Castor oil, cotton seed oil cake, soybean, refined soy oil, mustard seed, crude palm oil, sesame seeds
- Soft: Gur
- Guar complex: Guar seed (10 MT), Guar gum refined splits.
- Index products: AGRIDEX
Similar to NSE’s Nifty50 and BSE’s SENSEX, even NCDEX has a benchmark index known as NCDEX AGRIDEX.
While SENSEX tracks the performance of top 30 stocks, NCDEX AGRIDEX tracks the performance of 10 most liquid commodities on the NCDEX platform like Chana, Gaur Seeds, Soybean etc.
Apart from commodities, NCDEX also NCDEX rain index and NCDEX monsoon index tracking Indian monsoon between 1st June – 30th September every year.
Participants in commodity markets in India?
Like the stock market, the commodity trading market is also dominated by:
- Hedgers
- Speculators
1. Hedgers: Hedgers are producers, manufacturers, etc. who participate in the commodity trading market only to hedge their risk. Their aim is to reduce risk, not make profits.
For example: A rice farmer wants to hedge the price risk on his produce. So, he enters into a futures contract. Now, if the price of rice falls in the local market, he can sell his futures contract and make profit. In case the price rises, he can sell the produce at a higher price in the local market.
This way farmers, manufacturers hedge their risk in the commodity markets.
2. Speculators: Speculators are traders who simply speculate on the price of the commodity. Speculators aim to generate short term profits through commodity trading. They do not face any risk, which needs hedging. For example, Ravi expects that the price of rice will go up in the coming months. So, he buys a rice futures contract and sells when the price increases. This way, he makes a profit without taking any long term positions or physical delivery.
Should you trade in commodity markets in India?
Commodities markets are the perfect way for you to hedge your equity portfolio. Commodities and equities have a negative correlation. So, when equity markets fall, commodity markets rise and vice-a-versa.
Hence commodity trading helps you manage the stock market risks. Certain commodities like crude oil, gold, copper offer high trading volumes.
The importance of a commodity trading market?
Commodity trading market has provided an exchange platform for market participants where real price discovery of commodities can take place. Let’s look at the importance of commodity trading markets in India.
1. Real Price Discovery: Commodity trading markets have provided a transparent platform to farmers. This has helped in easy and real price discovery in the market. Prior to commodity trading markets, farmers were often easily looted by corrupt middlemen who used to buy from farmers cheaply and sell at a high price to traders. But with a centralized commodity trading exchange, the farmer’s interests are protected.
2. Better Quality of Commodities: Since commodity trading markets have strict rules on the quality of commodities traded on the exchange, the farmers are also paying special attention to growing top-notch commodities.
3. Better Price Risk Management: With commodity derivatives, farmers have various efficient price risk mitigation tools like futures and options.
4. Ease of Information: A central commodity trading market has helped farmers get access to information through free SMS, dedicated TV show ‘mandi.com’, and awareness and training programs throughout the country.
Currency (Derivatives)
For Indian Currency Market read this document PDF.
Forex Market
Forex (FX) pairs to trade?
Did you know that many professional and institutional traders only focus on one or two currencies
or only a few another trading instruments? The reason for that is to enable them to become really
proficient with the instrument they chose.
Now I’m going to break down the risk of trading too many pairs in greater detail, in addition to
how you can choose the right currency pairs to trade.
Correlation & Excessive risk exposure
The more some instruments behave like each other, the more correlated they are. If two
instruments have 100 % correlation, it means that they move the same way. If their correlation is
-100%, then they move in exact opposites. These are the extremes of the scale, but in reality, the
correlation numbers are somewhere in between. Here is a forex correlation table (from www.Mataf.net) with major FX pairs to give you an idea about the correlation numbers:
Forex Correlation Table
In this picture you can, for example, see that correlation between EUR/USD and USD/JPY is -4.8%. This is a really low correlation, and it means that those currency pairs move quite differently and independently to each other.
If you want to make your instrument list bigger, you need to accept the fact that there will be more and more instruments with pretty high correlation. Unfortunately, there isn’t a simple way to get rid of the correlation problem because the markets are connected. If there is for example event like US Presidential election, you can be sure that a lot of markets and instruments will be affected and the price movements will be very similar in many markets.
I don’t see a problem with having an open position at that time (if it is part of your trading strategy, of course). Where I DO see a problem is when you trade too many instruments, and suddenly you are in too many HEAVILY correlated positions that all get triggered because of the Presidential election! This is called Excessive risk exposure, and it is a problem which you want to avoid.
It doesn’t have to be an extreme situation like that; sometimes there is something as simple as a USD rally. When this happens, all the pairs where one of the currency is USD move in unison. If you trade too many instruments with USD, you can find yourself in a pretty messy situation with, for example, 5 open trades all dependent on how the USD will move. Most likely all those 5 trades will end the same way, and that is just too much risk! If you were an institutional trader, you would probably get sacked for doing that.
So, my advice is this: don’t trade too many instruments/currencies with high correlation. If you do, make sure you have rules that prevent you from taking on too much risk. For example, don’t open more than two USD positions. This is an extremely simple trade management rule, but it’s massively powerful.
You can also halve your positions if you see that you are going to enter a trade on two heavily correlated instruments. Remember that you need to feel comfortable with losses as this cannot be avoided from time to time. What we don’t want though, is a single macroeconomic news event to hit us for 3-4 losing trades at once because we forgot they were all heavily correlated.
Being overwhelmed
Another problem that comes with trading too many currency pairs or other trading instruments is that it’s just really complicated to handle all the trades. If you want to be successful in trading, then the execution of your strategy needs to be basically flawless. You need to focus and follow the rules of your trading strategy 100%. Everything needs to be managed perfect – analysis, entry, exit, position management, money management.
Apart from that, you also need to know which macroeconomic news will impact the instrument/s you are trading and how large the impact will likely be. All that is doable if you focus on only a few trading instruments, but it is much harder when you trade 10+ of them on the intraday basis.
Choosing the right currency pair
At first, you need to consider the costs of trading. These consist of spread, broker commission, and swap. Generally speaking, the bigger the Market Share percentage, the lower the trading costs. Here are the most liquid currency pairs (pairs with the biggest Market Share):
Pairs with Biggest Market Share
I also need to mention that the costs of trading can fluctuate based on the instrument volatility. Generally speaking, the higher the volatility, the bigger the costs will be to trade the instrument (spreads mostly). You also need to be aware of the various instruments volatility in your trading strategy. This will require you to adjust your SL and PT accordingly to the volatility of the asset you are trading. Also, the strategy itself should be consistent with that currency pairs volatility and behavior. Some pairs are good for fast, aggressive trading, while still others are better for slower and calmer trades.
Here is a Daily Range table (average from the last 10 weeks) of various currency pairs to give you some overall picture of their average volatility.
Daily Range Table
In my trading, I prefer to avoid GBP pairs. If you look at the table, you can see that they are one of the most volatile. The GBP also tends to aggressively spike past major support and resistance zones, which doesn’t really suit my trading strategy as well as many of the others. For that reason, I usually avoid trading the British Pound.
Major currency characteristics
Every currency pair is unique and has its own characteristics. There isn’t a universal rule that would tell you which pair to trade and which to avoid. As I mentioned before, you need to go through them and see for yourself which ones fit you and your strategy best.
To give you some initial idea’s and to help you get started, I wrote out the characteristics of some pairs as I see them. I hope it can help you in choosing the right instruments for your own trading.
EUR/USD
- Excellent winning ratio with volume-based strategies. This pair is number one for me!
- The most liquid pair.
- The cheapest to trade.
- Average volatility.
- If something significant is happening in the markets, the EUR/USD will “tell” you.
AUD/USD
- Slow. Sometimes you really need to be patient, but on the other hand, you have plenty of time to think when managing your positions.
- Less volatile.
- Cheap to trade.
- Good and precise reactions to volume-based S/R zones.
- Commodity currency (depends on commodity prices and commodity-related news).
- China dependent – reacts to China-related news because Australia has a lot of business bonds with China.
USD/CAD
- More volatile.
- Not as cheap as other major FX pairs, but still good even for intraday trading.
- Good reactions to volume-based S/R zones but sometimes not so precise (sometimes shoots past levels and turns later).
- Very reactive to oil-related news and oil prices.
- Sometimes higher correlation with AUD/USD because of the oil and other commodities (CAD is a commodity currency).
USD/JPY
- More volatile.
- Cheap to trade (mostly because of high liquidity).
- Very precise reactions to volume-based S/R (even though it is volatile).
- Capable of spikes and big crazy moves.
- Safe heaven currency (uncertainty in the markets -> people buy JPY).
GBP/USD
- Volatile.
- Moderately cheap to trade.
- Hard to predict. Sometimes reacts sooner to volume-based S/R zones, sometimes too late, sometimes never.
- Usually quite “dead” during the Asian session.
- Good for catching trends (you need to be ready to quit fast though).
- Quick spike moves.
- Massive reactions to UK CPI news and BREXIT related news, not so much on GBP Rate Decision news (for now).
If I had to choose two of these major pairs to trade with my Volume Profile trading strategy, I would choose EUR/USD and USD/JPY. The reason I would select those two is that they are both cheap to trade, have good reactions to my volume-based S/R levels, and there is a very low correlation between these two pairs. Additionally, I can also use the same pip size for my take profit and Stop-loss which makes trade execution much easier.
This is just the way I personally see it. In the end, I think that it is best for you to do your own research and make your own opinion on what currencies are the best to trade. I will be happy if this helps you find someplace to start from and if it gives you an idea what things to consider when looking for the ideal set of instruments to trade.
Favorite FX Trading Instruments
Here are three approaches intraday trading, swing trading, and long-term investments.
As far as intraday trading is concerned, We have these four major pairs that are good to trade: EUR/USD, AUD/USD, USD/CAD and USD/JPY.
For swing trading and long-term investment methods which not so time-consuming and they are also pretty easily manageable. For that reason, you can trade swing trades and long-term investment trades as an addition to your intraday trades. My preferred forex pairs for that are: AUD/CAD, AUD/CHF, AUD/JPY, AUD/NZD, AUD/USD, CAD/JPY, EUR/GBP, EUR/JPY, EUR/USD, GBP/USD, CHF/JPY, NZD/CAD, NZD/USD, USD/CHF, USD/JPY and USD/CAD.
BONUS:
Best cryptocurrencies to trade
If you are into intraday trading or swing trading the cryptocurrencies, then I suggest you focus only on the most liquid – the ones with the biggest market capitalization. Big market capitalization means good liquidity, better spreads and a smaller chance of slippage. The absolute winner is obviously Bitcoin. Other ones that follow are for example Ethereum or Ripple. Below, you can see a table with the ten cryptocurrencies based on Market Cap.
10 Cryptocurrencies based on Market Cap
The cryptocurrency market is pretty young, so this table is liable to change continuously. You can see the up-to-date version here: https://coinmarketcap.com/
Another thing you should consider is volatility. You need the market to move to make money. Instruments that go sideways many days, then jump suddenly and then go sideways again really aren’t ideal for trading. At least not for intraday or swing trades.
That’s it for all the Market Segments Basics Explained.