Market side: Futures trading basics

LESSON 15: MARKET ANALYSIS

Marty Hibbs, Grain Merchandiser, Grain Farmers of Ontario

This monthly educational series will feature the basic workings of the futures and options markets and how they can be utilized to help farmers with risk management.

MARKET ANALYSIS CAN be defined as the study of the markets that are intended for investment by the investor. Unless one is investing on a hunch or a tip from a friend, there is a considerable degree of study involved when analyzing a stock or commodity for the purpose a getting a solid return on your investment.

There are generally two types of analysis that we will use to trade futures markets. These fall into two very broad categories: fundamental analysis and technical analysis.

In this lesson, I will attempt to define each type and over the next few lessons we will go more in depth as we discover the strengths and weaknesses of each one.

FUNDAMENTAL ANALYSIS
Fundamental analysis involves research into the underlying factors that determine the price level for a financial asset or a commodity. The type of analysis you would want to perform will depend heavily on which futures market you choose to invest in. For instance, if you decide to trade futures on wheat, you will want to analyze the fundamental factors that affect wheat prices. These include the United States Department of Agriculture (USDA) reports, including the supply and demand for wheat worldwide, as well as current carryover figures. From there, we also add in an array of other factors including: analyzing weather patterns, details on acreage planted, crop yields, supplies of alternative grains, and shipping costs. The list is endless and each factor may be interpreted differently by each analyst — there is no simple answer as to how the information will translate into the futures pricing.

TECHNICAL ANALYSIS
Technical analysis ignores fundamentals and can be either manual or automated. It is a system that uses past price chart movement to determine where a given commodity may be headed. Technical analysis studies market action primarily through the use of charts, for the purpose of forecasting future price trends.

A manual system involves a trader analyzing technical indicators on a chart and interpreting them. An automated trading analysis, involves the trader telling the software what signals to look for and how to interpret them. In its purest form, technical analysis considers only the actual price behaviour of the market or instrument, based on the premise that price reflects all relevant factors before an investor becomes aware of them through other channels.

This type of analysis takes the human element of fear and greed out of decision making, as emotion-driven behaviour can be detrimental to most traders.

Regardless of which type of analysis you focus on, it is important to realize that  there are no magical formulas to guarantee returns. Many traders use a combination of both technical and fundamental analysis in their decision making.

In my experience the two biggest lessons I can bestow on traders, regardless of which analysis is used, follow.

  1. Trade with the trend instead of trying to pick tops and bottoms.
  2. Get out when the market fails your expectations. The single biggest mistake I see is traders turning a $200 loss into a $2,000 loss by keeping a losing position. Cut your losses and let your profits run. •

Marty Hibbs is a 25 year veteran futures trader, analyst, and portfolio manager. Hibbs was a regular guest analyst on BNN for four years. He is currently a grain merchandiser with Grain Farmers of Ontario.

Lesson Definitions:

Trends: The general direction of a given market that can be classified as short, intermediate, or long term.  As a practice, I consider trends on daily charts as short term trends, weekly charts as intermediate term or long term, and monthly charts as long term or secular trends. This is not a hard rule but rather a reference to determine the real trend of a market based on historical price charts.

 

DISCLAIMER: This information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by the author, by Grain Farmers of Ontario, or by any other person as to its accuracy, completeness or correctness and Grain Farmers of Ontario accepts no liability whatsoever for any loss arising from any use of same.

About Marty Hibbs 31 Articles

Grain Merchandiser, Grain Farmers of Ontario