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Study of Convergence of Spot and Future Prices in Commodity Market: Findings and Suggestions

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  1. The commodity futures market is an efficient market as compared to the spot market wherein volatility is high in spot market.
  2. The market factors which includes government policies, weather – acts God, production and supply of commodities in the market etc. are the major determinants of price fluctuations in the market.
  3. Commodity market is highly speculative in nature wherein there is much scope for misleading the participants by few major players in the market.
  4. Notwithstanding the rapid growth and diversification of futures markets, their primary purpose remains the same as it has been for nearly a century and a half, to provide an efficient and effective mechanism for the management of price risks.
  5. The possibility of large profits or losses in relation to the initial commitment of capital stems principally from the fact that futures trading are a highly leveraged form of speculation. Only a relatively small amount of money is required to control assets having a much greater value.
  6. Futures prices arrived at through competitive bidding are immediately and continuously relayed around the world by wire and satellite.
  7. Spurred by the need to manage price and interest rate risks that exist in virtually every type of modern business, today’s futures markets have also been major financial markets.
  8. Whatever the hedging strategy, the common denominator is that hedgers willingly give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes.
  9. Futures prices increase and decrease largely because of myriad factors that influence buyers’ and sellers’ judgments about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years).


  1. Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not “one of the crowd.” Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not “one of the crowd,” to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend.
  2. Trade with trends, rather than trying to pick tops and bottoms.
  3. Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools. Use discipline to eliminate impulse trading.
  4. Have a disciplined, detailed trading plan for each trade; i.e., entry, objective, exit, with no changes unless hard data exchanges. Disciplined money management means intelligent trading allocation and risk management. The overall objective is end-of-year bottom line, not each individual trade.
  5. Cut losses short. Most importantly, cut your losses short, let your profits run. It sounds simple, but it isn’t. Let’s look at some of the reasons many traders have a hard time “cutting losses short.” First, it’s hard for any of us to admit we’ve made a mistake. Let’s say a position starts going against you, and all your “good” reasons for putting the position on are still here. You say to yourself, “ it’s only a temporary set-back. After all, the more the position goes against me, the better chance it has to come back – the odds will catch up.” Also, the reasons for entering the trade are still there. By now you’ve lost quite a bit; you sell yourself on giving it “one more day.” It’s easy to convince yourself because, by this time, you probably aren’t thinking very clearly about the position. Besides, you’ve lost so much already, what’s a little more? Panic sets in, and then comes the worst, the most devastating, the most fallacious reasoning of all, when you figure: “That contract doesn’t expire for a few more months; things; are bound to turn around in the meantime.
  6. Let profits run. Now to the ‘letting profits run” side of the equation. This is even harder because who knows when those profits will stop running. Well, of course no one does, but there are some things to consider.
  7. The kind of reasoning and emotionalism have no place in futures trading; therefore, the next time you are about to close out a winning position, ask yourself why. If the cold, calculating, sound reasons you used to put on the position are still there, you should strongly consider staying. Of course, you can use trailing stops to protect your profits, but if you are exiting a winning position out of fear…don’t; out of greed…don’t; out of ego…don’t; out of impatience…don’t; out of anxiety…don’t; out of sound fundamental and/or technical reasoning…do.


The commodities market is an avenue for the traders wherein they can transfer the risks of future price changes. But market as such is highly volatile and is based on the factors such as weather conditions, economic factors etc. the risks caused due to above said uncertainties can be minimized

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Study of Convergence of Spot and Future Prices in Commodity Market: Findings and Suggestions. (2019, January 28). GradesFixer. Retrieved October 20, 2021, from
“Study of Convergence of Spot and Future Prices in Commodity Market: Findings and Suggestions.” GradesFixer, 28 Jan. 2019,
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