Market side: Futures trading basics

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.

THE DISCUSSION ON technical analysis will consume the next six columns as we venture into various types of charting, patterns, and indicators as well as other tools to identify opportunities in futures markets.

Technical analysis, in contrast to fundamental analysis, is based on the study of the market action itself. This market action is then plotted on a chart. While fundamental analysis studies the reasons or causes for prices going up or down, technical analysis studies the effect of the price movement itself. Technical analysts claim that markets trend over time and that by charting market prices you can manage commodity price risk. Technicians further claim that by combining the use of price charts with appropriate marketing tools and pricing strategies, you could have a major positive impact on your profitability and therefore the long-term survival of your business.

Charting can be used without fundamental input or in conjunction with fundamental information. You will find that as you become more skilled in charting and technical analysis that the illusion of randomness in the commodity market will gradually disappear. This will lead to more confidence in making those crucial marketing decisions based on the idea that current prices have most fundamentals accounted for and are reflected in the current price of the underlying asset.

The ability to make commodity price forecasts is only the first step in the price decision making process. The second — and often more difficult — step is market timing. Since commodity futures markets are so highly leveraged (initial margin requirements are generally less than five per cent of a contract’s value), minor price moves can have a dramatic impact on trading performance. Therefore, the precise timing of entry and exit points is an indispensable aspect of any market commitment.

Timing is everything when dealing in the commodities markets, and timing is almost purely technical in nature. This is where a practical application of charting principles becomes absolutely essential in the price forecasting and risk management process. •

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: Technical Analysis: A form of future price prediction based on historical data which is usually incorporated into charts. This type of analysis is dismissed by many analysts. Today it is important to understand that most trading decisions by large funds are based largely on technical formations and indicators. Fundamental Analysis: Using balance sheets, cash flow statements, supply and demand reports, and widely read government reports to arrive at an opinion on market direction. This type of analysis has limitations as they depend on available information which technicians feel is already factored into the price of an underlying asset.

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.