Common Mistakes Traders Make in Commodity Derivatives & How to Avoid Them

Commodity derivatives trading in India, whether in crude oil, natural gas, gold, silver, base metals, or agri-commodities, offers traders the chance to participate in global markets with comparatively small capital. With the presence of MCX and NCDEX, Indian retail traders today have access to some of the world’s most liquid and volatile commodities.

But this opportunity comes with a critical warning: high leverage + high volatility = high risk.

A small mistake in equity trading may result in a minor loss. But an error in commodity derivatives can wipe out margins, trigger a margin call, or even lead to forced square-offs. Understanding these mistakes is not optional—it is the difference between sustainable trading and frequent losses.

This upgraded and comprehensive article explains why traders commit these mistakes, how they lose money because of them, and what they can do to avoid them using discipline, data, and risk-management principles used by professional traders.

Introduction - Why Commodity Derivatives Demand Precision

Commodity derivatives behave differently from equity derivatives. Prices are susceptible to:

• Global supply–demand changes
• Geopolitical tensions
• Currency movements
• Weather disruptions
• Inventory reports
• Unexpected macroeconomic releases

Unlike stocks that depend primarily on company fundamentals, commodities are influenced by factors far beyond Indian market hours. Overnight movement in crude oil on NYMEX or a sudden spike in gold due to geopolitical panic can open MCX contracts with significant gaps.

Add leverage into the equation, often 10x to 20x, and even a 1% move in the underlying commodity can translate into massive gains or equally large losses.

This is why most mistakes in commodity derivatives don’t just hurt P&L, they magnify losses dramatically and quickly.
Understanding these mistakes is the first step towards becoming a disciplined and consistently profitable trader.

Mistake 1: Trading Without Understanding Contract Specifications

This is the most common mistake among new commodity traders. They jump into trading crude oil, gold or natural gas without understanding contract size, tick value, expiry, or margins, which leads to unplanned exposure and unexpected losses.

What Traders Usually Misunderstand

Commodity contracts are not uniform. Each has different:

• Lot size
• Tick size (minimum price movement)
• Expiry cycle
• Daily price limits
• Margin requirement
• Physical / delivery settlement conditions

Example:

• Crude Oil (MCX)
  • Lot size: 100 barrels
  • Tick size: ₹1 → ₹100 per tick
    A ₹50 move against your position means ₹5,000 loss per lot.

But many beginners think a contract behaves like an equity future, where exposure is easier to estimate.

Example Scenario

A trader buys Crude Oil Futures at ₹6,000, thinking a ₹10 move will result in a small loss.
But the lot size is 100 barrels.

• Price moves to ₹5,960
• Loss per barrel = ₹40
• Total loss = ₹40 × 100 = ₹4,000

In just a few minutes, a minor price fluctuation wipes out 10–20% of his margin.

Why This Mistake Happens

• Traders fail to read the contract note
• They focus only on the chart, ignoring lot specifications
• They underestimate the impact of tick size
• They trade a contract too large for their capital

How to Avoid This Mistake

Use this Contract Specification Checklist before every trade:

✔ Know the lot size and tick value
✔ Understand expiry and delivery conditions
✔ Calculate total exposure per lot
✔ Check margin requirements and possible margin increases
✔ Verify liquidity (particularly in far-month contracts)

Professional traders never enter a commodity derivatives trade without understanding how much 1 tick or 1% move impacts their capital.\

Mistake 2: Mismanaging Margins & Leverage

Commodity derivatives on Indian exchanges use SPAN + Exposure margin, and margins can change intraday due to volatility. Many traders underestimate how leverage impacts their position.

Why Margin Calls Happen

• Sharp price movement increases losses
• Sudden rise in volatility leading to increased margin requirement
• Taking oversized positions with insufficient buffer
• Holding positions overnight without accounting for global risk

Example Scenario

A trader buys Natural Gas Futures requiring ₹65,000 margin.
Suddenly, due to US inventory data, volatility spikes.
MCX raises margins to ₹90,000.

If the trader doesn’t have additional funds, the broker may initiate a margin call or square off the position, often at a worse price.

Why This Mistake Happens

• Traders use the maximum leverage the broker allows
• They believe margins will stay constant
• They don’t maintain a safety buffer
• They ignore global events that increase volatility

How to Avoid This Mistake

✔ Never use more than 30–40% of your capital for margin
✔ Maintain at least 2× margin buffer
✔ Reduce position sizes before major events (inventory reports, OPEC meetings)
✔ Track volatility using indicators like ATR and VIX-equivalent data

Leverage amplifies both profits and losses; mismanaging it is one of the fastest ways traders blow up their trading capital.

Mistake 3: Ignoring Volatility & Global Cues

Commodity markets are global. MCX prices are strongly influenced by:

• NYMEX crude oil
• COMEX gold & silver
• LME base metals
• USD/INR currency rate

Many Indian traders focus only on domestic charts and ignore global cues.

Example Scenario

Crude Oil on MCX is trading calmly.
But at 7:00 PM, a geopolitical event erupts in the Middle East.
NYMEX crude spikes $2 within minutes.
MCX opens significantly higher, whipsawing traders who were unaware of the global move.

Why This Mistake Happens

• Traders rely solely on technical levels
• They trade without checking global futures or economic calendars
• They ignore inventory data and supply-demand factors

How to Avoid This Mistake

✔ Track global commodity charts (NYMEX, COMEX, LME)
✔ Follow major events:

• OPEC meetings
• US inventory reports
• Fed rate decisions
• Global geopolitical tensions
  ✔ Monitor USD/INR, which impacts MCX prices
  ✔ Reduce position size before key announcements

In commodities, global cues are not optional; they are essential for survival.

Mistake 4: Overtrading & Chasing Quick Profits

Commodity markets move fast. A single candle on Crude Oil or Natural Gas can cover the day’s range of a stock index.
This tempts many traders into overtrading, driven by:

• Greed
• FOMO (fear of missing out)
• Revenge trading after losses
• Belief that high volatility = quick profits

How Overtrading Hurts Traders

• Frequent trades increase transaction costs
• Emotional decisions replace analysis
• Losses accumulate faster
• Margin depletes quickly
• Traders move to riskier contracts to recover losses

Example Scenario

A trader makes ₹3,000 profit in the morning.
Believing the trend will continue, he increases position size.
One reversal in Natural Gas wipes out not only profit but the entire day’s capital.

How to Avoid Overtrading

✔ Use a pre-defined number of trades per day
✔ Set maximum loss limit per day and stop trading when hit
✔ Trade only high-quality setups
✔ Track emotions in a trading journal

Overtrading is not a market problem—it is a behavioural mistake.

Mistake 5: Poor Risk Management (No Stop-Loss, No Position Sizing)

This is the single biggest reason traders lose money in commodity derivatives.

Why Stop-Loss Is Non-Negotiable

Commodities like Crude Oil or Natural Gas can move sharply during:

• Inventory announcements
• US session spikes
• Global news
• Currency volatility

Without a stop-loss, traders risk:

• Margin erosion
• Forced square-offs
• Emotional panic exists
• Catastrophic losses

Example Scenario

A trader buys Natural Gas before the US inventory data, expecting a bullish reaction.
The actual report shows higher supply → price crashes.
In two minutes, NG falls by ₹4, resulting in a ₹4 × 1250 = ₹5,000 loss per lot.
Without a stop-loss, the loss can double before the trader reacts.

Essential Risk Tools

✔ Use stop-loss in every trade
✔ Risk only 1–2% of total capital per trade
✔ Use position sizing formulas
✔ Avoid averaging losers

The Risk-per-Trade Approach

If capital = ₹2,00,000
Risk allowed per trade = 1% = ₹2,000

If stop-loss = ₹10 per unit
Position size = ₹2,000 ÷ 10 = 200 units

This ensures survival even during losing streaks.

Mistake 6: Incorrect Hedging or No Hedging at All

Commodity derivatives were originally designed for hedging, not speculation.
But many traders either misuse hedging or avoid it altogether.

Who Should Hedge?

• Manufacturers
• Exporters
• Importers
• Jewellery businesses
• Agro-producers
• Traders holding large inventory

Example Scenario: Business Not Hedging

A jeweller expects to buy 5 kg of gold in 3 months.
Gold price today: ₹62,000 per 10 grams.

If gold rises to ₹65,000, the business faces a higher input cost.
By taking a long position in Gold Futures, they could have locked in a price and avoided the loss.

Why Hedging Mistakes Happen

• Lack of understanding of futures
• Incorrect contract month selection
• Hedging too early or too late
• Over-hedging or under-hedging

How to Hedge Smarter

✔ Use futures to lock input/output prices
✔ Match contract size with physical requirement
✔ Use options for limited-risk hedging
✔ Understand rollover cost in long-term hedges
✔ Avoid speculative positions while hedging

A good hedge stabilises cash flows and protects the business from volatility.

Mistake 7: Holding Contracts Till Expiry Without Understanding Rollovers

Many traders unknowingly hold futures contracts until expiry, facing:

• High volatility in the last week
• Rollover cost due to the spread between near-month and next-month contracts
• Delivery settlement risk in certain commodities

Example Scenario

A trader holds Copper Futures near expiry.
Due to low liquidity, the bid-ask spread widens.
Rollover cost increases.
The trader ends up paying more to switch positions.

Why This Mistake Happens

• Traders forget expiry dates
• They do not track rollover spread
• They mistake commodity expiry for stock market expiry
• They are unaware that some contracts have a delivery obligation

How to Avoid This Mistake

✔ Track a rollover calendar
✔ Square off or roll over 3–5 days before expiry
✔ Monitor cost of carry
✔ Avoid holding positions till the last day
✔ Understand which contracts are deliverable (agri-commodities)

A disciplined rollover strategy prevents unnecessary costs.

Mistake 8: Ignoring Options Trading Risks in Commodity Derivatives

Options in commodities behave differently from equity options.
They are highly sensitive to volatility, time decay, and global cues.

Common Mistakes

• Buying only deep OTM options because premium is cheap
• No exit plan
• Misunderstanding time decay
• Ignoring Greeks
• Selling naked options without sufficient margin

Example Scenario

A trader buys a Crude Oil 200 points OTM Call at ₹20 premium.
Crude moves slightly up, but not enough to increase the premium.
Time decay erodes the option to ₹5, resulting in a loss despite the correct direction.

How to Avoid These Mistakes

✔ Choose strikes close to spot price
✔ Avoid trading only cheap OTM options
✔ Track implied volatility (IV)
✔ Use spreads instead of naked positions
✔ Always plan exits before entering

Commodity options require a balanced approach—without understanding Greeks, traders often lose consistently.

Mistake 9: Trading Without a Plan or Post-Trade Review

Successful traders follow a structured plan.
Struggling traders rely on intuition, tips, or impulsive decisions.

What Happens Without a Plan

• No defined entry or exit
• Emotional decision-making
• Inconsistent results
• No understanding of what strategies work
• Repeated mistakes

Importance of a Post-Trade Review

A trading journal helps analyse:

• Why trades worked
• Why trades failed
• Whether risk rules were followed
• Impact of emotions
• Setup quality

What Traders Should Track

✔ Entry & exit reason
✔ Pre-trade analysis
✔ SL/target adherence
✔ Emotional state
✔ Mistakes & learnings

A disciplined review process turns average traders into skilled professionals.

How Traders Can Avoid These Mistakes 

Here is a powerful, actionable checklist to help traders avoid the most common mistakes:

Commodity Trading Checklist

Before Entering a Trade

• Understand contract specifications (lot size, tick value)
• Know margin requirement & total exposure
• Check global cues (NYMEX, COMEX, LME, USD/INR)
• Confirm trend using technical analysis
• Place stop-loss and calculate risk-per-trade
• Ensure your position size fits risk rules
• Avoid trading near major events unless experienced

During the Trade

• Avoid averaging losing positions
• Stick to stop-loss
• Monitor margin levels
• Avoid emotional decisions
• Do not overtrade during volatile spikes

At the End of the Day

• Review every trade
• Note mistakes and improvements
• Track performance weekly

Following this checklist builds consistency, discipline, and long-term profitability.

Conclusion - Discipline Is the Real Edge in Commodity Derivatives

Commodity derivatives trading offers immense potential, but only to traders who combine knowledge with discipline.
In this market, avoiding mistakes is often more profitable than chasing high-risk opportunities.

The difference between a struggling trader and a successful one is not a secret strategy—it is:

• Understanding contract mechanics
• Managing leverage
• Controlling emotions
• Using risk management consistently
• Learning from every trade

If traders adopt a structured approach, follow risk rules, and avoid behavioural mistakes, they can participate confidently in India’s vibrant commodity markets.