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  1. Beginner's Guide To Trading Futures: Introduction
  2. Beginner's Guide To Trading Futures: The Basic Structure of the Futures Market
  3. Beginner's Guide To Trading Futures: Considerations Prior to Trading Futures
  4. Beginner's Guide To Trading Futures: Evaluating Futures
  5. Beginner's Guide To Trading Futures: A Real-World Example
  6. Beginner's Guide To Trading Futures: Conclusion

Once you decide which futures market is right for you and have opened an account with a broker, the next step is to evaluate the market. As with most financial markets, there are two main types of tools that traders use to analyze futures: fundamental analysis and technical analysis.

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 perform depends heavily on which futures market you choose to invest in. For instance, if you decide to trade futures on Treasury Bonds, you should analyze the fundamental factors that drive bond prices. These include the level and direction of economic activity, Federal Reserve monetary policy, supply and demand, investor sentiment, and daily economic and news releases. On the other hand, traders of futures contracts on corn would be far more interested in analyzing weather reports, details on acreage planted and crop yields, supplies of alternative grains (substitutes) and shipping costs.

Fundamental analysis varies widely among the different futures markets, and one market may have very little in common with another. That’s why many traders choose to focus their attention on just one or two futures markets. Doing so allows them to concentrate their efforts on developing keen analytical abilities for say, the oil market, while at the same time developing experience in trading that commodity. Rapidly switching from one futures market to another, seeking to trade whichever is the most volatile or popular at a given moment, is usually not recommended, particularly if you’re using fundamental analysis.

Regardless of which market you focus on, it’s important to realize that most retail investors and traders don’t have access to the same type of information as some other market participants – which means you may be at a disadvantage. In some markets (such as equity or interest rate futures), it may be possible for a very well-informed and dedicated individual to have nearly as much information for conducting analysis as a bank or institutional investor. In some markets, however, this isn’t practical. (For related reading, see What is the Difference Between Institutional Traders and Retail Traders?)

For example, if you’re trading corn, no matter how many reports you read on the state of the market, you’re unlikely to have as firm of a grasp on the fundamentals as a corn farmer in Iowa or Nebraska, not to mention a large agricultural company such as Monsanto. Similarly, in the oil market, ExxonMobil is likely to have a better feel on the supply and demand in the oil market for the next three months than even the most well-informed individual trader. (For more, see What Economic Indicators are Especially Important to Oil Traders?)

Because of this information disadvantage, it’s important to be as well-informed about your chosen market(s) as possible, while at the same time maximizing your advantages. Remember, Monsanto or ExxonMobil are interested in hedging their forward production, not exploiting daily price movements, and they’re so large that their trades can be cumbersome. As an individual, you have the ability to be more nimble and opportunistic than some larger institutions.

Regardless of the market you choose, before beginning to trade you should plan on doing a great deal of research into the underlying fundamentals and market conditions of that market in order to maximize your opportunities for success. (For related reading, see Introduction to Fundamental Analysis.)

Technical Analysis

The second main group of tools used to evaluate futures markets includes those that fall under the heading of technical analysis. While fundamental analysis is concerned with determining the intrinsic value of an asset, technical analysis tries to predict future price action by evaluating historical price and volume by using technical indicators, such as the one shown in the following chart.


A technical indicator called the Bar Analyzer applied to a five-minute chart of the e-mini S&P stock index futures contract. Image courtesy PowerZone Trading.

There are many proponents of technical analysis, especially among active traders. One benefit of technical analysis is that, unlike fundamental analysis, many of the charts and tools that technical analysts use can be carried from one market to the next. That means that although there may still be benefits to concentrating on certain markets, a technical analyst may have more flexibility than a fundamental analyst in moving from market to market.

If you decide that technical analysis is right for you, it’s recommended that you learn as much as possible about the various tools and techniques. A good starting point for more information can be found in Investopedia’s Basics of Technical Analysis guide. (For related reading, see 7 Technical Indicators to Build a Trading Toolkit.)

Regardless of whether you choose to focus on fundamental or technical analysis, remember that you don’t have to rely on one to the complete exclusion of the other. Even many fundamental analysts examine charts to determine entry and exit points for trades they have discovered through their research. Similarly, even staunch chartists pay attention to important fundamental news developments and supply and demand developments. No matter what a chart says, if a hurricane wipes out all the large Gulf Coast oil refineries, the price of oil is likely to rise because of the sudden decrease in supply.

Tools and Techniques

In addition to fundamental and technical analysis, there are a number of other tools and techniques that can help you trade futures. The most important of these is risk management. As mentioned earlier, the use of leverage in futures trading increases both the reward and the risk. To avoid being wiped out by unexpected market movements, it’s important to practice strict risk management – such as always using a protective stop-loss order when entering a trade. A stop loss acts as a line in the sand where you exit the trade and cut your losses, regardless of whether you still believe in your original premise.

Another important risk management tool is diversification – meaning you should spread your capital among a number of small bets within the futures market and across time (don’t put all your eggs in one basket). Diversification also means that trading futures should not be the entirety of your investment program. In addition to your futures trading account, you should have other, longer-term investments – such as stocks and bonds.

Other tools include various types of research and charting platforms. Fundamental analysts, for example, may want access to general market news sources (online and print), plus specific sources depending upon which markets you choose to follow. For instance, if you’re active in the agriculture markets, you may want to follow and analyze reports issued by the U.S. Department of Agriculture. Similarly, energy traders may want to follow OPEC announcements read annual and quarterly reports from major oil companies, such as ExxonMobil (XOM), BP (BP) and Chevron (CVX).

Technical analysts, on the other hand, should find a robust trading platform they can use to research, chart, buy, sell and monitor trades. Many futures brokers offer at least one platform (desktop, web-based and/or mobile) either for free or for a monthly fee that may (or may not) be based on your trading volume. To compare trading platforms, check out Investopedia’s Broker Center.

Beginner's Guide To Trading Futures: A Real-World Example
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