Trading Futures Contracts

Futures contracts are contracts on currencies, stock market indexes, or commodities. These contracts attempt to predict the value of these securities at some date in the future. When dealing with commodities, trading futures contracts is a commitment to deliver or to receive a specific amount of a commodity during a specified month at a price that is determined by the futures market. When you sell a futures contract, it means that you have an obligation to deliver the commodity by a certain date and conversely when buying a commodity you have agreed to buy the commodity at a specific price at a specified date. When trading futures contracts, most of the time, the trade never ends in an actual delivery of the asset, but instead these contracts are closed out before the delivery date. The purpose of futures markets in general is to provide a useful and competent means to manage price risks and the purchasing of futures is done through discount brokers and full-services brokers. Futures trading requires that the investors accept price risks from producers with the goal of making a profit.

There are advantages and disadvantages to trading futures contracts, both of which will be discussed in this article. The risks apply more to the speculators and this is due to the fact that futures orders are typically bought on margin. In fact, futures traders only have to deposit five to ten percent, and the rest of the contract can be bought on margin. Additionally, it is very easy to lose your original investment in a volatile market and is therefore suggested that only professionals trade in the future markets. Investors also must be aware of the tax consequences due to the high amount of leverage that can create huge capital gains and losses.

The advantages to trading futures contracts deals with the concept of hedging. The goal is to obtain a perfect hedge when you trade futures. Basically, you can opt to sell your commodity at the current market price or you can “lock in” a price for your commodity to be sold at a specific price at specific time in the future. This comes in handy for farmers who must speculate what their commodity will cost at a specific date in the future. (Many farmers must wait until harvest so they don’t know that the current market price will hold). If the farmer is content with the price of the commodity today, then they will sell the futures contract to guarantee that they will get today’s price at a future date. Additional advantages to online futures trading include the fact that futures markets are very active so you can liquidate contracts quite easily. Basically, trading futures is very useful to reducing any unwanted risk.

Trading futures contracts is a great way to invest money however it is not easy. Many people suggests that only professionals do it, but if you study, understand what you are doing and approach it as a professional would, then there is no reason that it can’t be a great way to invest for you.

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Market Direction

Candlestick analysis creates a number of parameters that becomes a built in discipline. The reason most investors do not make money is because of their own emotions. When we make the decision to put our funds at risk, we have also inherently put a piece of our ego to the test. It is our mental capacities that will be judged based upon whether a trade makes money or loses money. When we make money with a trade, our self worth expands greatly. When we lose money on a trade, mentally we judge ourselves as losers, stupid, and many other derogatory feelings that we feel about ourselves. We hate to lose. That is what causes most people to let losses keep growing. Once we decide to close that trade as a loss, we have now solidified the fact that our mental processes were flawed. If we keep the position open, maybe it will come back to positive. Then we would be validated as a winner, not a loser.

Unfortunately, the markets did not care what you do or what you think. The markets are going to do what they are going to do. How you perceive what those movements may be has nothing to do with the market movements. Candlestick analysis provides a visual format that greatly reduces the emotions of investment decisions. The markets move in patterns. Candlestick signals help illustrate what is occurring and has occurred many times in the past. The caveat to that statement is adding “with a high degree of probability”. Candlestick analysis is merely the evaluation of investor sentiment. Investor sentiment works in a specific manner most of the time. Utilizing the information that is built into candlestick patterns and signals provides a visual format for recognizing the next reoccurring price movement.

This is powerful information. This makes evaluating what is occurring in market/price trends at critical levels. This is clearly evident in the Dow. The recent congestion of the past two weeks is providing analyzable forecasts for what the market might do from this area. The trend analysis becomes much easier knowing what occurs after the completion of specific patterns. As described in earlier newsletters, the dumpling top forecasts the potential of an extremely strong downtrend. Once that downtrend has completed, a new set of pattern potentials present themselves. The J-hook pattern, for example, is usually a result after an extremely strong price move. The recent strong downtrend could be the precursor to a bearish J-hook pattern. That possibility still exists if the Bears can push prices to new lows over the next few days. The failure of the Bulls to be able to close trading above the T-line provides more credence to the bearish J-hook set up.

DOW

Today’s bullish trading provided more evidence of a possible pennant formation. Positive trading from this level would make that prognosis more viable. In either case, an investor can make a reasonably intelligent assessment of what to do based upon what patterns may be setting up. Continued weakness from this level would warrant shorting positions or buying the short funds. Witnessing more bullish trading would make the pennant analysis more feasible. This would lead to looking for long positions. However, any long positions established would be done so with taking quick profits if the top of the pennant formation showed resistance.

Candlestick signals forming at support and resistance levels gain that much more credibility when analyzing what new price pattern could be developing. The T. line has become a very valuable technical level to watch. Buying a position after a candlestick buy signal can be maintained as long as it does not close back below the T. line. The research that has been performed involving the T. line produces a simple format for when to stay in and when to get out of a position. The Japanese rice traders did not have this technical indicator to help confirm candlestick signals. The benefit we have today is adding computer-aided technical indicators to help improve the probabilities of candlestick signals.

CNB

Because we are constantly trying to find trading techniques that dramatically improve our probabilities of making money, to disregard what has already been proven now becomes a detriment to your account balance as well as your mental perspectives. As often stated, this is not rocket science. This is merely combining information continually improves your trading abilities. Learn how to use candlestick signals correctly. Once you do, you’ll have a completely different perspective on how to invest successfully. Your emotions would not continue to be a flaw.
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Good investing,

The Candlestick Forum Team

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