February 2012

Futures Trading Methods – Fundamentals and Technicals

February 16, 2012

Fundamental analysis and technical analysis are two core schools of thought in futures trading methods. Fundamental analysis looks at the economic factors, which are known as the fundamentals, such as demand and supply condition, economic cycle etc.  Technical analysis, on the other hand, looks at the price movement of a commodity and uses this information to forecast or anticipate the movements of the price in coming days. Though, both of them are very popular techniques used in futures trading, but each of them has some unique features and benefits.

Demand and supply versus the charts and graphs

Fundamental analysis for the futures is all about the study of the factors affecting the demand and supply of the futures. The main goal is to collect the information and interpret them in order to make decisions, before this information is reflected in the futures price. For a fundamental analyst, the trading opportunity is the lag time between any event, and its result on market response.  For example, in agricultural futures trading, the fundamental analyst gathers information about inflation, consumption patterns, consumer tastes, population and other factors, that affect the demand and supply of the agricultural goods. All the information is put together to determine the future movements of price of the commodity.

However, in technical analysis the analyst approaches to the price of the futures, from the charts and graphs. Technical analysts believe that there is no need for fundamental analysis, because they think all the factors in fundamental analysis have already affected the price of the futures in the market. They consider that the market price truly reflects all the changes in historical performances.  Technical analysts conclude that all the information to predict the price of the futures can be obtained from the charts and graphs.

Investment Horizon

Fundamental analysis is usually done considering the data and information over a longer period of time, for instance, information on the demand and supply of five or ten years.  While technical analysis is done on a relatively shorter time-frame, it can be done for months, weeks, days, and even for minutes.  This different time-frames also reflect the investment horizons of two different investor groups. Those who prefer long term investment horizon might consider the fundamental analysis as more useful and those who prefer short term investment horizon may consider the technical analysis more suitable.

Investing versus Trading

Usually the person, who considers that the technical analysis is more important, purchases and sells futures for the purpose of trading. That means, he wants to make profit by buying and selling the futures, he does not actually intend to own the underlying commodity or the asset. On the other hand, fundamental analysis is done for investing in the futures for a longer period of time.

Fundamental Analysis and Technical Analysis for Successful Trading

Both the fundamental and technical analysis can be easily done with some basic knowledge about them. Information to perform the analysis is also available to a number of sources. Information for fundamental analysis can be easily obtained from internet or stockbrokers.  The commonly used tools for technical analysis like Fibonacci Sequence,  Moving Averages, MACD or Bollinger Bands can be obtained from a number of websites. One can also get these charts and analysis from the investment experts. Understanding the proper use of fundamental analysis and technical analysis would enable one to make correct decisions on futures trading.

{ 0 comments }

What is Futures Trading and Why Do People Trades Commodities?

February 7, 2012

Trading commodities futures contracts: Hedgers and speculators

Future trading is one kind of investment, in which one investor takes a position when he thinks the price of a commodity will rise or fall in coming days. In other words, future trading involves buying or selling future contracts, which is a standardized contact between two parties, in which one party agrees to deliver a specific commodity, with a specific price, quality and quantity.

Dealers of future commodities trading are classified in two broad groups: hedgers, who seek to hedge out the risk, and speculators, who try to make profit by anticipating the movement of the price.

Hedgers

Hedgers take a position to avoid the risk of unexpected price movement. Their main target is to get protection from the loss, not to make profit by taking risk. They include consumers or producers of the products and services or the owners of the assets, who are exposed to certain types of risk, such as the interest rate risk.  The producers of crops or livestock often sell futures contracts, in order to get a certain price in future, when they would sell their products. This also helps the producers to plan the costs associated with the production.

Speculators

Speculators try to make profit by anticipating the direction that prices are going to move. There are mainly three types of future commodity speculators; position traders, active traders and swing traders. Position traders hold positions for the long term, active traders or the day traders enter more than one trade during the day and close out their positions at the end of the day, and swing traders buy or sell at the top or bottom of the price swings.  There are a large number of speculators in the oil and gold commodity futures markets.

Hedgers and speculators can trade futures of hundreds of various types of commodities including the corn, lumber, gold, cotton, steel, wheat, beef, and foreign exchange of currencies, better known as FOREX trading.

Getting Started In Futures Trading

One can easily get started trading through a commodities brokerage service and trade the Chicago Mercantile Exchange, the largest exchange for future contracts, which was founded in 1898.

And, while it is pretty easy to start trading futures, it’s important to consider the fact that Hedgers and Speculators from all over the world trade commodity futures at this market, every day.  Each of these traders are actively planning how to take money from the market, this fact, in combination with the highly leveraged nature of futures contracts, means that careful consideration and planning should be put into any trade – before the trade order is given.

{ 0 comments }

The Difference Between Trading Stocks And Trading Commodities

Many people are unsure about the difference between trading stocks and trading commodities futures contracts, sometimes even those who are already trading in stocks. There is a lot more information that is readily available concerning stocks. The evening news will even report on the stock market and occasionally mention specific stocks; but of commodities, seldom [...]

View The Full Trading Article →