Commodity Futures Overview

The process of trading commodities is also known as futures trading. Unlike other types of investing such as stocks and bonds, when you trade futures you don’t actually buy anything.  Trading commodity futures includes the speculation of the future direction of the price of the commodity you are trading. To put it another way, you are actually betting that the future price will either go up or down, and how that will effect you depends on if you are the buyer or the seller of the commodity. The large companies that operate in these futures markets use futures contracts to lock in their selling prices for the product in advance of delivery of the product. The company that does this is actually doing what is referred to as “hedging.”  The other side of the transaction, when dealing with commodity futures, is the trader who speculates on whether the commodity price will go up or down before the contract is due for delivery. When trading commodity futures, no one has to take, or make a delivery of the underlying product that the futures contract represents.  Most of the time, the trader merely offsets his or her position at some time before the date that the contract is due.

The commodity futures market includes items such as wheat, corn, gold, silver, pork-bellies, heating oil, lumber, and many additional commodities. The main commodity trading groups actually include currencies, interest rates, stock indices, grains, meats, energies, metals, and food and fiber.  Currency trading is a great market for long-term trend followers since they exhibit long-term trends that reflect the health of the economy.  Interest rates also have great long-term trends with the best contracts being the T Bonds and T Notes.  Another category in the commodity futures market includes stock indices. Most commodity and futures traders use the S & P but they may also trade the DAX, the NASDAQ, and the Dow Jones. Energy is another group used when commodity investing, and it is the biggest physical commodity group in the world as it relates to volume. It also exhibits great, long-term trends all of the time. The main focus for speculators trading metals is on Copper, Gold and Silver. Additional metals that have produced great trends in recent years include platinum, and palladium.  Grains and meats have recently lost their luster and now speculators trade more financials, but the popular commodities in the group include pork-bellies, as mentioned above, live hogs, feeder cattle, and live cattle. The last group includes the food and fiber group. These commodity futures markets look at orange juice, cotton, coffee and cocoa, however cotton is probably the best market for long-term trend followers.

If you are interested in trading commodity, it is important to familiarize yourself with the COT report. The COT report stands for Commitments of Traders and the report is drawn by the Commodity Futures Trading Commission.  This report contains detailed information in the futures market on positions and volumes of contracts.  It is not meant for exclusive use of foreign exchange trading, but it instead lists out the conditions in the futures markets about contracts and whether the net contracts were long or short.

Many successful traders have become very rich in the commodities markets. When looking to invest in commodity futures investors know that it is one area where an individual who has limited capital can make great profits in a relatively short period of time. Patience and education is a must if you are interested in the commodity futures market.

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Analysis of a trend is greatly enhanced when applying candlestick analysis. The signals provide the information of what investor sentiment is doing right now. The accumulation of those signals becomes a better indicator when a pattern can be recognized. Does this breakout through the top of the pennant pattern today indicate the starting of a bullish move? When applying the candlestick signals and recognizing what patterns everybody else may be watching, the probabilities are extremely high the bullish sentiment has now taken control. The returns of a portfolio are dramatically improved when knowing which direction the overall market trend is going.

The simple mechanical analysis of a trend is made much easier to visualize with candlestick signals. Investing is merely the commitment of funds to investment situations where the probabilities are in your favor. Candlestick signals provide a very easy to structure format for when to get into high profit trades and where to appropriately set stop losses.

Commodity traders - The analysis of a trend becomes much more critical when trading commodities. Due to the leverage and the speed in which prices can move in the commodity markets, it is very important to know when to get into a trade and when to get out. Candlestick analysis provides a trading format that most investment techniques do not provide. Fundamental news can affect a commodity price dramatically. However, a good percentage of the time it is not always clear which direction news might affect a trend. Candlestick formations allow an investor to immediately take advantage of reactions.

The right combination of candlestick analysis and the placement of stop losses can produce inordinately large gains. Currently, the World Cup Advisors trading account is up 91% gross since its inception of this past August. There will be an extensive e-book dissertation on how to use candlestick signals correctly trading commodities. It is in progress.

Candlestick analysis provides a very important facet for analyzing not only when a trend reverses but when a trend is continuing. This becomes a vital piece of a trading program for maintaining profitable trades. Candlestick signals work well on their own. A trend analysis can be greatly enhanced by adding some simple technical indicators. It has been illustrated over and over in our chat sessions and our daily chat room how the T-Line works as an effective trend confirmation. Rick's many years of combining candlestick signals with additional enhancing indicators has provided him with a very good living.

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Note in the soybean chart how the T-Line has provided obvious support during late latest uptrend. Applying some very simple rules allows an investor to continue to hold trending positions even when profit taking would be very tempting. As with all candlestick analysis, there is nothing difficult in combining some of the confirming indicators. Once you learn which indicators provide a high probability trend factors or reversals, your profitability for your trading account will grow dramatically.

Good investing,

The Candlestick Forum Team