Trading commodities on a commodities exchange is futures trading commodities. Commodities futures were developed by producers and buyers of commodities in order to stabilize commodity prices. Hedging of risk by both producers and buyers involves futures trading commodities by everyone from gold mining companies to cattle producers and silver refiners to companies that sell refined sugar. Futures trading commodities involves entering into a contract to either buy or sell a standardized amount of a commodity on a future date. Futures contracts are commonly made for months and even years in advance. The value of the contract will vary as the projected or anticipated price changes. Traders use technical analysis tools such as Candlestick chart analysis to anticipate price movement in commodities markets. A good place to get started with commodities is with Commodity and Futures Training.
Spot Price and Strike Price
The current price of any equity, including commodities, is the spot price. It is the price at which things are bought and sold, the current market price. The future price of a commodity can be anticipated but not known exactly until the day when it is sold, unless a contractual price is agreed upon. In order to guarantee a price at which a producer can sell his or her product the producer will sell a futures contract. The price stated in this contract is the strike price. It is the agreed upon price at which the producer will sell the commodity, no matter what the spot price may be. A trader speculating in futures trading commodities can make a profit from the difference between the contract or strike price and the spot price. What typically happens is that a trader will buy or sell a commodity futures contract for a given commodity and hold it until the commodity price moves. Then he or she will exit the position, taking his or her profit. A commodity trader virtually never holds his or her position until expiration as they do not really wish to take delivery of a herd of cattle or have to come up with several tons of soybeans to sell.
Anticipating Price Change and Gaining Profits
Anticipating commodity price movement by the use of commodity trading charts allows traders to profit in futures trading commodities. Rice traders in ancient Japan recognized that price patterns of rice repeated themselves. These traders also noticed that different patterns predicted different types of subsequent price movement. Candlestick pattern formations that predicted certain price movement led to Candlestick trading tactics that led to substantial profits. Candlestick analysis is just as valid today in futures trading as it was in Japan in the days of the Samurai. Market history repeats itself and those who pay attention can profit, repeatedly.
Analysis and Profits
Both fundamental and technical analysis are necessary in order to profit trading commodities. Fundamental analysis is essential in order to understand the basis of pricing. Technical analysis is essential to understand the market created by thousands of traders buying and selling both commodity futures and options contracts on commodity futures.
Market Direction
Why is the halfway point of a candle important to Japanese Rice traders? As illustrated in today’s markets, it reveals when the Bears are back in control. The Japanese Rice traders have a very simplistic and common sense explanation for the candlestick signals. The Dow formed a Bullish Engulfing signal on Thursday after a long legged Hammer signal and an Inverted Hammer signal. Friday saw some profit-taking, as was expected after the strong bullish day of Thursday. Today’s trading closed back down below the halfway point of Thursday’s candle body. What does this mean? The Japanese Rice traders simply explain that if the Bullish Engulfing signal of Thursday was a signal that showed the Bulls were now in control, then when the Bears were able to close more than halfway down that candle, it demonstrated the bears were back in control.
This weakness in today’s trading now illustrates the tee line and the 200 day moving average area are continuing to act as resistance. Any week trading tomorrow would warrant buying the short funds again. If you are not making very much money over the past couple of weeks, do not be discouraged. Today’s close is almost exactly at the same level the Dow closed eight trading days ago. There will be times when the market does not allow investors to make money. This current sideways motion illustrates that point. Do not get discouraged. Recognize what the market is doing. Be prepared to take advantage of the next market move. Weaker trading tomorrow may indicate the downtrend is still in progress. Buying short funds may be the logical strategy.
Stop losses Intraday
The use of stop losses during the day is an important tool for protecting profits as well as maintaining a clear mental outlook. Note the overall trend of wheat. It has been moving down and the tee line has been an effective resistance level. Remaining short has been profitable. The simple rule that the downtrend remains in progress as long as they cannot close the price above the tee line. This allows a ‘short’ investor to remain comfortable until they witness a candlestick buy signal and a close above the tee line. The only concern for the short investor is stochastics being in the oversold condition. This makes the application of a logical stoploss very important. Although Friday’s Bearish Engulfing signal may have been the indication the next wave to the downside may be starting, there was still the possibility that wheat prices were in a bottoming stage.
Had today’s trading closed positive, after trading down most of the day, a much different formation would have occurred. A Hammer signal would have formed in the oversold conditions. If that were the case, the 10 minute chart provides a level that would indicate the would be forming on a daily chart. Putting a stop one tick above the early high of the day would have indicated the Bulls were in control. That was a good place to get stopped out of short positions. If the trading had remained positive at the close, the Hammer signal would have been a worrisome signal for a short position. However, as seen on the 10 minute chart, a Hanging Man signal was followed by a Bearish Engulfing signal. This indicated that the price of wheat was heading back down with approximately 30 minutes left to trade in the day. This created the opportunity to reshort the position going into the final few minutes of trading. Why would this be important? The week trading going into the close created a bearish candle, confirming the bearish engulfing signal of Friday, continuing the next leg down. This is completely different than if the price had remained strong going into the close, forming a Hammer signal in the oversold area.
Examining short-term charts allows an investor to extrapolate what the longer-term chart is going to look like. Stopping out of a position when it looked like the position should not be maintained was the prudent thing to do. Reestablishing the short position when it appeared as if the sellers were back in control was once again the prudent thing to do. In this case, stopping how of the short position did not cause the profitability of this trade to suffer. The trade could’ve been reestablished at approximately the same level it had been stopped out. These situations are easily evaluated using candlestick analysis.
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