Analysis of the Futures Market

The two basic methods to analyze futures markets are the fundamental and the technical analysis. These convey certain similarities with the used methods to select stocks.

The fundamental analysis refers to factors that affect the physical supply and the demand for commodities, which affect their prices A commodity’s physical supply consists in the current reduction plus the burden from something previous plus any import.

For example, the gold supply includes the gold mixed in the United States and Canada plus the gold kept in safes and any other additional import of gold coming from South Africa, Australia and Russia. For some commodities information about supply is difficult to get. Information about grain supply, for example, is launched to the public during harvest time. The relative current supply with the demand of a commodity has influence over future prices.

The supply is the amount of buyers that are willing to buy at a specific price. When prices are high, there is less supply for a commodity than when prices are low and supply grows. Equally, an increase in a commodity’s supply has the opposite effect  (increasing the price).

Speculators anticipate shifts in prices and react as follows: when one expects commodities prices to raise, futures contracts are bought and when one expects commodities prices to fall, contracts are sold.

However, if it were so easy to predict commodities prices in the future, there would be much more millionaires. And this would be the only game in the city. There are many other factors that cannot be foreseen or anticipated that can affect the supply and demand of a commodity, which does not allow one to be a visionary in relation to the direction commodity prices will follow in the future.

The technical analysis uses the past volume and the movement of prices to determine future prices and it is based in the premise that history repeats itself over and over again (past prices determine future prices) and that there are trends in price shifts.

Without mattering if technical analysis or basic ones are used, futures contracts investors should count with a strategy. One of these strategies is to limit losses to allow gains to continue.

Due to leverage gotten through investing in futures contracts , if prices decline to reach margin calls, investors then are disposing additional funds in the hope of recovering some of their losses instead of limiting them by going out of position.

When prices raise, investors should allow their gains to grow, while carefully monitoring prices to get those gains.