Technical analysis of futures. How individual traders trade futures
Modern futures is a part of the capital market, an effective tool to compensate for price fluctuations and “instant” averaging of money demand without a sharp change in supply. The technical analysis of such assets has features, using which you can avoid mistakes and increase the reliability of your transactions on Forex.
The main difference between assets lies in the structure of the Forex market and the market for futures contracts, that is, in the principles of market price formation.
The Forex market is an over-the-counter interbank market used by banks and other financial institutions for speculation and regulation of financial flows. Real volumes are not visible precisely because there is no single trading platform. The volume of speculative transactions is over 70%. Despite active attempts at regulation, the degree of control over such a market is low. Technical analysis is complicated by the fact that each broker has its own price stream.
The futures market is a centralized (transparent) exchange market, which, during the process of clearing transactions, connects the seller and the buyer on the exchange. There is no spread, floating bid / ask is minimal and is regulated by the volume of client orders. That is, if a real client buys a real futures contract, but the price of the asset falls, then it is this client who incurs losses, and the one who sold this contract to him makes a profit. The loss of the client in no way becomes the profit of the exchange or broker. The exchange lives at the expense of the commission from the turnover, which is assigned to the client individually: if there are few transactions, the commission is equal to the spread (similar to Forex), with a large number of transactions, it is much lower.
Please note: most forex brokers calmly declare that they guarantee futures trading, but the list of trading instruments, as a rule, contains only CFD assets. It is highly recommended to study and feel the difference before opening real trades. You can read in detail here about futures on Forex .
A little about the subject
All futures that may be of interest for Forex trading are calculated, that is, they are not expected to be actually delivered. Today, a wide range of trading assets is offered in the form of forward contracts: currency rates, commodities, stock and settlement indices, securities, metals, and energy. Technical analysis of futures should take more fundamental factors into account. The exchanges constantly trade in contracts with different expiration dates, therefore there is a special exchange calendar for several years with a clear indication of the delivery date for all assets.
Now it is completely unnecessary for a futures to be based on a real asset (stock, bond or commodity) - it can be any information, such as the likelihood of an increase in interest rates or the result of national elections. The demand and conditions for such assets are formed by the market.
Index futures can be considered a separate group of assets: general, industrial, regional. An additional factor influencing the dynamics of composite or industrial indices is the reporting of the enterprises included in its calculation - pay attention to the corresponding calendar. New index assets are constantly emerging, for example, recently CME Group launched futures on - a new index for assessing the real value of the dollar (similar to the DXY), it is calculated based on a basket of ten currencies (EUR, JPY, CAD, MXN, GBP, AUD, CHF, KRW, CNH, BRL).
Features of technical analysis of futures
Major futures can be traded through a standard forex terminal, using practically the same principles of fundamental and technical analysis, using standard order types. Moreover, initially all technical tools were developed specifically for trading commodity contracts.
Forex quotes come from a variety of sources, and the prices of CFD assets that are offered to you in a regular forex terminal may at a particular moment differ significantly on different sites. This is not possible with real futures, trading is carried out only on exchanges, and only a specific trading pair, buyer-seller, form quotes. All exchange platforms openly publish their prices for the previous trading day with an accuracy of 1 tick, so all clients have the same data when working with futures in trading terminals.
Futures contracts are term assets, that is, they have an end date of closing (expiration), before this date the contract must be fulfilled, that is, the client can voluntarily get rid of the assumed obligations. To hold a deal longer than the expiration period, you need to regularly switch to a later contract. If you do not close a futures deal on time, the broker will forcefully close it and the price will not be the best. It goes without saying that most speculators own the asset for a fairly short time.
Futures is, first of all, volatility, because the share of short-term speculators on the real exchange is also quite impressive. But with a reasonable approach, such activity may well bring a stable income on Forex transactions within the day. Nervous reactions to fundamental news or force majeure can be compensated for by analyzing related markets.
The heterogeneity of futures volatility is constantly affected. Even if, on average, the "life" of a contract is from 3 to 6 months, then the main trading volume for it occurs in the last 3 weeks (for short-term contracts) or in the last 2 months (for long-term), that is, when this futures becomes the closest expiration date.
This complicates long-term analysis. Immediately after the opening of the contract, it lacks liquidity - sharp price jumps occur, closer to the closing date, a stable, but still too strong volatility appears. As a result, when a Forex asset approaches a strong support / resistance level, a futures asset may not react to this because of its “youth”, or give false signals because large volumes of transactions are recorded before the current contract is closed. Therefore, to analyze CFDs in the Forex trading terminal, you need to use the data of a futures that is in the "middle" of its term, when it is most consistent with technical analysis and is not subject to calendar speculations.
Since a futures is a transaction in which there are two parties (seller / buyer), the concept of the number of open positions shows the degree of interest of trading participants in a particular price movement, and the more open interest in a particular futures, the more price movement should be expected. ... We take data on open interest from CME reports or on other exchange resources.
The closer to the expiration date of the futures, the more transactions on it are recorded. The asset market becomes thin, with gaps, large players with large volumes are activated on it, speculating and shifting the price in the direction they need. At such times, the futures price can no longer be used as a “guide” or a source of trading signals for CFD assets or currency pairs.
There is no locking and no swap in futures trading, but there is rollover and there is clearing. There is always a difference between the spot prices and the futures analog - it is maximum when a new contract is opened, and decreases as we approach the contract closing date. In addition, price calculations are complicated by the difference in one asset, but with different terms.
Getting ready to trade futures
Before you start trading any futures, in addition to the minimum technical analysis, you need to do some preparatory work. First, we specify the ticker of the asset (either on the CME www.cmegroup.com, or on the ICE www.theice.com), for example, gold gets into the “Metals” section, in the “Precious” column with the ticker “GC Gold”. Next, we study the specification of the contract - "Contract Specifications" with the main parameters of the asset. Dozens of contracts can be traded in parallel (visible in the "Listed Contracts" section), we need the most liquid one. We are looking for data in the appropriate section, for example, on the BarChart website, in the “Volume” column - the largest volume is needed. If the data of neighboring contracts are approximately equal, then we choose a longer period.
Be sure to clarify for ourselves the last day of trading and the expiration date for the selected contract, so as not to remain with an open deal in the last hours of its existence. Otherwise, in the best case, you will have to close in a thin market with non-standard spreads, and in the worst case, the broker will fix your deal at a very unfavorable price.
It is recommended to transfer a deal to the next contract (close the current one and open a new one on a more “distant” futures), at least a few working days in advance for monthly futures, and 1.5-2 weeks in advance for quarterly ones.
Please note: in futures, instead of leverage, the concept of "collateral margin" is used, which may differ for different contracts, as well as the cost of 1 tick.
Strategies for trading futures
Almost all trading strategies that have worked well on futures assets can be successfully applied in Forex, but subject to certain rules.
Despite the high average volatility - scalpers on futures do not survive, the overwhelming majority of real exchange traders are trending medium-term traders, and large volumes of futures are in long positions for almost the entire period. As a result, a swing movement appears before the close of contracts in order to bring the market price as close as possible to the level of the contract. After opening a new futures, the price can return to the previous level just as quickly.
As a rule, large exchange traders use a minimum of technical analysis, preferring the technologies of volume analysis and VSA to traditional calculated indicators. Almost all of the advertised indicator strategies of the luminaries of trading were created specifically for Forex. The use of oscillators such as RSI or Stochastic in futures trading usually only adds false signals, but trend indicators, in particular, combinations of moving averages, as well as indicators based on momentum, are required.
The movement in news futures is usually very strong (especially on indices), but it looks illogical. Statistics show that in 90% of cases, futures traders use fundamental information that has not been worked out by the market or has completely lost its relevance. The influence of fundamental factors, especially on commodity futures, is always multifactorial, and for a normal, well-founded reaction, the market takes some time to analyze.
The insider factor most of all affects the main futures (oil, gold, S & P500, the dollar index): having important information before the main market, large players before the news artificially move the price against a logical movement in order to force the bulk of traders to jump into the market, and in fact after the release of the news quickly perform the unloading of the recruited position. That is why, contrary to technical analysis, even on negative data, underlying futures always give short-term impulses in the opposite direction and also quickly roll back, which is very dangerous for small deposits with an insufficient StopLoss level.
It is assumed that in a stable market, exchange players will always follow the trend identified on the intraday chart. Let's recall one simple but stable strategy for trading futures
Trading by pivot points
This technique is most consistent with the logic of real exchange players, who consider the data of the previous day as the basis for determining the dominant trend. Trading assets: stock indices; oil; gold; major currency pairs.
Technical analysis defines pivot points as price support / resistance levels calculated based on the Low, High and Close prices of the previous closed period (H1 / D1 / W1 / MN1). If necessary, calculations are performed for all timeframes sequentially, but, naturally, the smaller the data range for calculation, the lower the accuracy of the constructed levels. Daily pivot points of the day allow you to build a scheme of work for each subsequent currency session.
The classic scheme for calculating daily pivot points begins with determining the central pivot point of the day: PP0 = (Low + High + Close) / 3.
We calculate the first resistance from it: R1 = (PP0 * 2) - Low; and the first support: S1 = (PP0 * 2) - High.
The second pair of support & resistance is defined as: R2 = PP0 + (R1– S1); S2 = PP0 - (R1 - S1).
The trading technology is elementary: we open a trade every time a breakout of the nearest pivot point (by a closed candle).
From the point of view of the foundation, it is believed that the values described above show the levels where the interests of large players have been in equilibrium for a long time. Experienced traders use pivot points in combination with other instruments to determine the entry point as accurately as possible using additional indicators or a chart pattern.
Do not forget: the whole world has been trading on pivot points for several decades and there is no secret in this. Subject to strict money management, the pivot points trading strategy will be profitable only if three conditions are met:
- you need to correctly determine the shock day;
- open strictly according to the trend during the trading session.
- keep a profitable position until the next pivot level is reached.
The idea of pivot points is quite effectively used by the shock day theory, which can be seen in Rezvyakov's strategy. A shock trend day is determined at the beginning of the session: if the price starts moving in the area of the pivot point, then with a 90% probability the day will be trending. If the price at the beginning of the trading session does not fall within the range of the pivot point, for example, above R2 or below S2, then we are waiting for a flat and it is worth reducing the volume of an open deal or not entering the market at all.
Strong price levels formed by limit orders, repeatedly tested by the market for breakout / pullback, have been used by large players for many years to determine the trend. according to the bump day system, it is not recommended to open new trades on Friday (due to the high risk of a gap on Monday) and at the end of the futures.
As a rule, the strategy uses a stable oscillator in addition to the pivot points, for example, the classic MACD - its signals reduce the number of entry points by about 3 times, but significantly increase reliability, especially with further transaction support.
Using futures as an indicator
For evaluating futures, tick volumes do not matter at all, so any technical analysis of Forex, both on a real futures and on a CFD asset, will only evaluate mathematical dependence. Futures counterparts can be used as "guides" using the proprietary indicators that are used in exchange trading terminals. Then you can get trading signals that take into account the dynamics of real volumes. A successful example is the trading system of Sergei Rublev and his System Ryblev ArrowSTUDY futures indicator, created for the Thinkorswim trading platform.
Using its signals as a guideline, you can trade short-term on a regular currency pair or CFD versions of futures in regular MetaTrader. So, on the futures stock chart we have:
- a pink arrow or "starting candle" as a result of the conditions for the entry point for the strategy;
- horizontal level - for a pending order 2-3 points higher or lower;
- white arrow - breakout of the pending order level.
As a result, we take signals from TOS, and open deals on MT4. The trading system works strictly according to the trend, it has shown itself perfectly on major currencies and commodity futures, the working timeframe is from M15. The stop to profit ratio is at least 1: 4.
And as a conclusion ...
For most small traders, full-fledged contracts are not available due to financial conditions, but for almost every popular index and commodity futures there is a mini-contract option, for example, E-mini S & P500, E-mini DowJones, E-Mini NASDAQ or E-mini Euro, with more loyal conditions and, of course, only for speculation. Due to traders with small deposits under such contracts, liquidity is always higher than for the main asset.
According to professional traders, futures are eternal, because it is an ordinary trading agreement of exchange participants, it has more logic, and technical analysis on it is much more reliable. In addition, this is a natural stage in the development of a small speculator into a serious player.
A lot of different financial instruments are traded on the Moscow Exchange: stocks, bonds, currencies, futures and options contracts, and so on. So, for example, for bond trading, interest rates, indicators of company reports, as well as the news background that affects the debt burden of the issuing company, are more important. In turn, technical research on bonds is carried out much less frequently due to the high stability of the charts of these instruments and the investment nature of investments in these assets.
Rice. 1. Bond schedule
Futures are much more volatile and can generate income even from intraday price fluctuations. The analysis done with futures is mostly technical and is somewhat self-fulfilling prophecy, as too many traders are guided by technical factors. But technical analysis of futures (TA) is somewhat different from the analysis of their underlying instruments. Let's see what this difference is.
Features of technical analysis of futures
Futures is, first of all, a contract concluded in accordance with a specification, in which its main trading characteristics are spelled out. The number of concluded futures is constantly changing, since contracts can be entered / broken, unlike stocks, the number of which is constant. The reason is that a stock is an equity paper, but a futures contract is not.
Rice. 2. Specification of Sberbank stock futures
Excess volatility
Since the maximum leverage in futures trading is very high, and to conclude a transaction, only a reserve of collateral is required with low commissions for transactions, the share of short-term speculators is also very impressive. This, in turn, can add volatility to the trend in the futures contract versus the underlying asset.
Rice. 3 Excessive volatility of an RTS index futures compared to the underlying asset
Inhomogeneity of movements in different periods of futures circulation
Each futures has a start date and last day of circulation. Simply put, it is finite in time, and therefore the movements in it are non-uniform. On average, the life of a futures is 9-13 months, but the bulk of it passes in the last 3 months, when the futures becomes the closest by the expiration (execution) date. In this regard, there is some difficulty in the long-term analysis of futures due to the effect of sharp price jumps in the early life of a futures caused by its insufficient liquidity.
Rice. 4. Schedule of futures and shares of Gazprom
Stitching effect
If a technical study is being conducted in which several futures with the same underlying asset are present, it can be difficult to analyze the transition from an earlier futures to a later one, as their prices may differ. And this significantly complicates the technical interpretation.
Rice. 5. Schedule of a futures on Sberbank shares with execution in December 2016 and March 2017.
To analyze a futures, an analysis of the underlying asset is required
If we take into account that the futures are trading recently relative to their underlying asset, since they have a trading start date, then the analysis of the underlying asset must also be carried out. There are situations in which the underlying asset may approach important support / resistance levels, which may have an impact on the derivative, but which are not visible in the futures due to its “youth”.
Rice. 6. Analysis of the underlying asset
Number of open positions
Since futures is a contract, and the number of contracts is not constant, the concept of the number of open positions, or open interest (OI), arises. OI is always an even value, since two parties are required to conclude one contract: a buyer and a seller. OI shows the degree of involvement of trading participants in the fate of a particular movement in a futures. It is assumed that the more OI in a futures, the more powerful the movement will follow. And vice versa, the chances of the trend being realized are small in the absence of OI in the futures.
Rice. 7. Graph of the RTS Index futures and its open interest
Distribution of open positions by long and short among individuals and legal entities
In addition to the number of open positions, futures contracts also publish data on their distribution between legal entities and individuals by longs and shorts at 19.00 of each trading day. These data can serve as additional basis for analysis, since a sharp predominance of one of the groups of participants can provoke a movement in the corresponding futures.
Rice. 8. Distribution of open positions by long and short among individuals and legal entities
Dividend backwardations
Since dividends are paid only on stocks and not on futures, futures often become cheaper than their underlying assets - stocks. As a rule, this occurs before the closing date of the dividend register for an amount approximately equal to the amount of declared dividends.
Output
Each financial instrument has a number of features inherent in it. Even classical methods such as technical analysis can have certain assumptions depending on the asset being analyzed.
At first glance, this comparison is not entirely clear, but everything will become clear if we decompose the decision-making process into two components: the actual analysis of the situation and the choice are applied. For successful trading on the stock exchange, the ability to choose the right time to enter and exit the market is of tremendous importance, especially in futures transactions, where the leverage is so high. After all, you can correctly guess the trend, but still lose money. A relatively small amount of collateral (usually less than 10%) leads to the fact that even minor price fluctuations in an undesirable direction for you can oust you from the market, and as a result, lead to partial or complete loss of collateral. For comparison, when playing on the stock exchange, a trader who feels that the market is going against him can take a wait and see attitude in the hope that sooner or later there will be a holiday on his street. The trader holds his shares, that is, he turns from a trader into an investor.
In the commodity market, alas, this is impossible. For futures transactions, the buy and hold principle is absolutely unacceptable. Therefore, if we return to our two components, in the analysis phase. "You can use both a technical and a fundamental approach to get the correct forecast. As for the timing, determining the points of entry and exit from the market, a purely technical approach is required here. Thus, considering the steps that a trader should take before taking on market obligations, we can once again make sure that at a certain stage it is the technical approach that is absolutely irreplaceable, even if fundamental analysis was applied in the early stages.
FLEXIBILITY AND ADAPTABILITY OF TECHNICAL ANALYSIS
One of the strengths of technical analysis is undoubtedly that. that it can be used for almost any trading medium and in any time frame. There is no such area in operations on the stock and commodity exchange, where the methods of technical analysis are not applied.
If we are talking about commodity markets, then a technical analyst, thanks to his charts, can monitor the situation in any number of markets, which cannot be said about fundamentalists. The latter, as a rule, use so many different data for their forecasts that they simply have to specialize in one market or a group of markets: for example, grain, metals, etc. The advantages of a broad specialization are obvious.
First of all, any market has periods of bursting activity and periods of lethargy, periods of pronounced price trends and periods of uncertainty. A technical analyst can freely concentrate all his attention and forces on those markets where price trends are clearly traced, and all the rest can be neglected for now. In other words, it makes the most of the advantages of the rotational nature of the market, and in practice this is expressed in the rotation of attention and, of course, funds. At different periods of time, certain markets suddenly begin to "seethe", prices for them form clear trends, and then activity fades, the market becomes sluggish, price dynamics - uncertain. But in some other market, at this moment, a burst of activity suddenly begins. And a technical analyst in such a situation has freedom of choice, which cannot be said about fundamentalists, whose narrow specialization in a certain market or group of markets simply deprives them of this opportunity to maneuver. Even if the fundamental analyst decides to switch to something else, this maneuver will require much more time and effort from him.
Another advantage of technical analysts is the "broad view". Indeed, by following all the markets at once, they have a clear picture of what is generally happening in the commodity markets. This allows them to avoid the kind of "blinkeredness" that can result from specialization in any one group of markets. In addition, most of the futures markets are closely related to each other, they are affected by the same economic factors. Consequently, price dynamics in one market or group of markets may be the key to unraveling where some completely different market or group of markets will go in the future.
TECHNICAL ANALYSIS FOR VARIOUS MEDIA OF TRADE
The principles of graphical analysis are applicable to stock, and on commodity markets. As a matter of fact, initially technical analysis was used precisely on the stock exchange, and came to commodity a little later. But since they appeared futures deals on stock indices(stock index futures), the border between the stock and commodity markets is becoming more and more elusive. Technical principles also apply to analysis international stock markets(International Stock Markets) (see Fig. 1.2).
Rice. 1.2 International Stock Markets
Over the past ten years have become extremely popular financial futures, including on interest rates and world currencies. They have proven to be excellent objects for graphical analysis.
The principles of technical analysis can be successfully applied in operations with options and spreads. Since forecasting prices is one of the factors that must be taken into account by the hedger, the use of technical principles when hedging has undeniable advantages.
TECHNICAL ANALYSIS FOR VARIOUS TIMES
Another strength of technical analysis is the ability to apply it on any period of time. And it does not matter at all whether you are playing on fluctuations within one trading day, when every tick is important, or analyzing a medium-term trend, in any case you are using the same principles. It is sometimes argued that technical analysis is only effective for short-term forecasting. In fact, this is not the case. Some people mistakenly believe that fundamental analysis is more suitable for long-term forecasts, and the lot of technical factors is only short-term analysis in order to determine the moments of entry and exit from the market. But, as practice shows, the use of weekly and monthly charts covering market dynamics over several years is extremely fruitful for long-term forecasting.
It is important to fully understand the basic principles of technical analysis in order to feel the flexibility and freedom of maneuver that they provide to the analyst, allowing him to apply them with equal success to the analysis of any trading medium and at any period of time.
ECONOMIC FORECAST
At times, many of us tend to view technical analysis from a very specific angle: as something used to predict prices and trade in the stock and futures markets. But after all, with the same success the principles of technical analysis can find themselves and wider application, for example, in the field of economic forecasts. Until now, this area of technical analysis was not very popular.
Technical analysis has proven to be effective in predicting the development of financial markets. But do these forecasts have any value in a macroeconomic context? A few years ago, The Wall Street Journal published an article titled "Bond Sharps Are The Best Leading Indicators of Economic Bust and Bust." The main idea of the article was that bond prices capture the coming changes and the economy with amazing clarity. The article contains the following statement:
"The bond market as a leading indicator outperforms not only the stock market, but any well-known leading indicator used by the US government."
What's important here? First of all, let's note the mention of the stock market. The Standard & Poor's 500 Index is one of the twelve most common leading economic indicators that the US Department of Commerce focuses on. The author of the article cites data from the National Bureau of Economic Research in Cambridge, Massachusetts, according to which the stock market is the best of the twelve leading indicators. The fact is that there are futures contracts for both bonds and the Standard & Poor's 500 index. Since both contracts lend themselves well to technical analysis, it means, in the end, we are doing nothing else. as economic forecasting, knowing it or not. The most striking example of this is the powerful upward trend in the bond and equity markets, which in the summer of 1982 heralded the end of the deepest and longest economic downturn since World War II. This signal remained practically unnoticed by most economists at that time.
The New York Coffee, Sugar and Cocoa Exchange (CSCE) has proposed futures contracts for four economic indices, including the Housing Starts and the Consume! Price Index for Wage Earners. A new Commodity Research Bureau Futures Price Index futures contract is expected to be introduced. This index has long been used as a barometer to record inflation pressure. But, in fact, it can be used much more widely. An article in the Commodity Year Book (1984; Commodity Research Bureau, Inc.) explores the relationship between the CRB index and all other economic indicators by analyzing four business cycles dating back to 1970 (see Fig. . 1.3).
Rice. 1.3 The graph shows a clear relationship between the SRV futures index (solid line) and the industrial output index (dashed line).
For example, it indicates that the values of the CRB index are closely related to the dynamics of the index of industrial production, in the sense that the index of futures prices, as a rule, anticipates the change in the values of the second index. The article says: "The apparent relationship between the CRB and industrial output indicates the effectiveness of the CRB as a broad economic indicator." (Stephen Cox, "The CRB Futures Price Index is a basket of 27 commodities that may soon become the subject of futures contracts", p. 4). On my own behalf, I can only add that we have been drawing graphs and analyzing the dynamics of the CRB index for several years now, and always with constant success.
Thus, it becomes abundantly clear that the value of technical analysis as a predictive tool goes far beyond determining which direction the prices of gold or, say, soybeans are moving. However, it should also be noted that the merits of the technical approach to the analysis of macroeconomic trends have not yet been fully explored. The Consumer Price Index (CPI-W) futures contract, introduced on the Coffee, Sugar and Cocoa Exchange (CSCE), became the first swallow of such contracts on economic indices used to analyze the stock market. It is difficult to answer unequivocally here. Basically, the principles are the same, but there are a number of significant differences. The principles of technical analysis were initially applied in the stock market and only later came to the commodity market. Many basic tools - for example, bar charts, point-to-digital charts, price patterns, trading volume, trend lines, moving averages, oscillators - are used in both. Therefore, it is not so important where you first encountered these concepts: in the stock market or in the commodity. It will not be difficult to rebuild. However, there are a number of common differences, which are related more to the very nature of the stock and commodity futures markets than to the tools that the analyst uses.
Pricing structure
The pricing structure in the commodity futures market is much more complex than in the stock market. Each product is quoted in strictly defined units of account. For example, in grain markets they are cents per bushel, in livestock markets they are cents per pound, gold and silver are in dollars per ounce, and interest rates are in basis points. A trader must study the details of contracts in each market: on which exchange the operations are carried out, how a particular product is quoted, what are the maximum and minimum price changes and what are they equal in monetary terms.
Limited contract duration
Unlike stocks, futures contracts have a limited duration. For example, the March 1985 long-term Treasury bond futures contract expires in March 1985. Usually a futures contract "lives" for about one and a half years. Thus, there are several contracts on the market at the same time for the same product, but with different execution months. A trader should know which contracts he should trade and which should not (this will be discussed later). The limited duration of futures will create some problems for long-term price forecasting. It becomes necessary to create new charts every time when trading on old contracts is stopped. Expired contracts charts are no longer needed. They are being replaced by charts of new contracts with their own technical indicators. This constant rotation makes it very difficult for our kind of "library" of current charts to function. Using a computer also doesn't make things easier, as keeping databases updated as old contracts expire takes additional time and money.
Lower collateral
This point is the most significant difference between stocks and commodity futures. Any futures contracts require the posting of collateral. Usually the amount of the collateral does not exceed 10% of the contract value. The result is a "leverage" effect, due to which relatively small price fluctuations in one direction or another can have a very noticeable effect on the state of the account that the trader controls. Therefore, on futures, you can quickly make or lose large amounts of money. Due to the fact that the size of the margin that the trader exposes does not exceed 10% of the contract value, a 10% price change in one direction or another will lead to the trader either gaining a 100% profit or losing his money. Everything can happen very quickly: right after breakfast you open a position, and even before lunch you will know the result. Due to the effect of leverage, which makes even small price fluctuations of great importance, the futures market looks more volatile and volatile than it really is. After all, when someone tells you that he "flew" in futures, do not forget that he flew in by no more than 10%.
From the point of view of technical analysis, the high leverage makes it necessary to pay special attention to the correct timing of actions. This is much more important for the futures market than for the stock market. The ability to accurately determine the moment of entry and exit is necessary for success in the futures market. However, this is much more difficult than doing market analysis. Therefore, technical methods are absolutely indispensable for successful futures trading.
The time interval is much shorter
Due to the high leverage and the need to closely monitor their market positions, a trader in the commodity futures market works with fairly short periods of time. Stock market analytics are interested in the long-term perspective of market development, while a futures market trader does not look that far. If the former can talk about where the market will move in three months or in six months, the latter is more concerned about where the prices will be next week, tomorrow or even today, in the afternoon. Such analysis requires the finest melee tools that technical stock market analysts may not even be aware of. Let's take moving averages as an example. In the stock market, the most commonly used moving average for a period of 30 weeks, or 200 days. In the commodity market, this period usually does not exceed 40 days. The following combination of moving averages is very popular for futures: 4, 9 and 18 days.
High dependency on timing
For futures trading, knowing when to enter and exit the market is paramount. If you managed to correctly determine the direction of the market, this is only half the battle, because a mistake when entering the market on one day, and sometimes in several minutes, can lead to a loss. No doubt, it's a shame if you didn't guess the direction of the market. However, losing, even despite the correct forecast, is doubly insulting. And this often happens in the futures market. There is no doubt that timing is the prerogative of technical analysis, since the fundamental indicators are quite stable and do not change daily.
Limited use of market averages when analyzing commodity futures
When analyzing the stock market, the movement of market averages such as the Dow Jones Index and the Standard & Poor's 500 Index is given tremendous importance; in fact, it is the starting point for technical analysis of the stock market. In the commodity market, this is not the case. "there are a number of indices that determine the general direction of price movement in a commodity market, for example, the CRB futures price index. The dynamics of these indices is carefully studied and taken into account when making forecasts. However, in terms of their importance for market analysis, commodity indices are not comparable to stock indices.
Limited use of general market technical indicators in commodity markets
General market technical indicators, such as the new highs-new lows index, the advance-decline line, the short-interest ratio, have a colossal share in forecasting in the stock market. market, but in the commodity market they practically did not find application. This is not to say that these indicators cannot be used at all in the futures markets. As the number of futures markets grows steadily, professionals may someday need broader indicators of market movement, but so far they are hardly used.
Special technical tools
Most of the technical tools were originally created specifically for the stock market. Therefore, in the commodity market where they came later, they are sometimes used in a slightly different way. For example, price patterns on commodity futures charts are not always formed as completely as on stock charts, moving averages are much shorter in length, traditional point-to-digital charts are rarely used. Due to the fact that information about price changes during the day is much more difficult to obtain, only "traders on the floor" use intraday pips-digital charts. We will touch upon these and many other differences in the following chapters of the book.
Finally, there is another fundamental difference between the stock and futures markets. Technical analysis in the stock market relies much more heavily on the use of psychological indicators(sentiment indicators) and analysis cash flow(How of funds analysis). Psychological indicators reflect the behavior of various groups of market participants: single traders, mutual funds, professionals working directly on the trading floor of the exchange. Great importance is attached to those psychological indicators that show the general "mood" of the market: bullish or bearish. The analyst here proceeds from the principle that the majority or the crowd is always wrong. Cash flow analysis deals with the cash positions of various groups, such as mutual funds or large institutional investors. In this case, the analyst argues as follows: the larger the cash position, the more money can be used to buy shares. While these forms of stock market analysis are not paramount, technical analysts often rely on them more than traditional market analysis tools.
Technical analysis of the futures markets, from my point of view, is the purest form of price analysis. Of course, it allows the use of the “contrary opinion theory” method, but the main emphasis is still placed on the analysis of trends and on the use of traditional technical indicators.
Introduction
The Forex / Forex market is a highly profitable and high-risk means of deriving profit from trades at exchange rates. The tools used in the Forex market largely determine the result of foreign exchange trading by Forex market participants who are clients of brokers. Each Forex broker offers its own trading terminal, however, most brokers and traders on the Forex market agree today in their choice of MetaTrader 4 and MetaTrader 5. options.
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Once you have decided which futures to trade and created an account with your chosen broker, you need to evaluate the market. Traders use two main types of analysis to evaluate most financial markets:
- Fundamental analysis
- Technical analysis
Fundamental analysis
Fundamental analysis involves the study of underlying factors that determine the price level of financial assets or commodities. The type of analysis will largely depend on which category of futures you choose to invest in. For example, if you decide to trade futures for Treasury bonds, you need to analyze the main factors that affect the prices of these bonds. These factors include the level and direction of economic activity, monetary policy, supply and demand, investor sentiment, and daily economic and press releases. On the other hand, grain futures traders will be much more interested in analyzing weather reports, planted areas and yields, supply of alternative grains and shipping costs.
The two short examples above show that fundamental analysis of one market has little to do with fundamental analysis of another. This is why many traders choose to focus on only one or two futures markets. This allows them to focus their efforts on developing keen analytical skills for, say, the oil market or the metals market. Switching quickly from one futures market to another, trying to trade depending on how volatile or popular it is at the moment, is unlikely to be a successful approach.
Regardless of which market you choose, it is important to understand that you are likely to have some kind of information gaps in relation to other market participants. There are two main types of market participants: speculators and hedgers. Speculators try to capitalize on price fluctuations while hedgers try to eliminate the risk associated with future price movements from their business. In some markets (for example, the interest rate futures market), a very well-informed and dedicated person could theoretically have the same amount of information required for analysis as a bank or institutional investor. And in some other markets, it's just not practical.
For example, if you are a corn trader, no matter how many market reports you read, you are unlikely to navigate better than a farmer in Iowa or Nebraska, let alone a large agricultural company like Monsanto. It is the same in the oil market. Exxon is likely to have a better feel for the dynamics of supply and demand in the oil market over the next three months than even a very well-informed average trader.
Despite this lack of information, it is important to be as knowledgeable as possible about the chosen market. Remember, Monsanto or Exxon are interested in hedging their assets, not speculating on daily price movements. They are so large that their deals can be quite cumbersome. As an individual, you have the ability to be more flexible and opportunistic than some of the larger companies.
Regardless of which market you choose, before you start trading, you need to do a lot of research on the underlying principles and conditions of the market in order to maximize the opportunities for success.
Technical analysis
The second main type of analysis used to evaluate the futures markets is technical analysis. While fundamental analysis is concerned with determining the intrinsic value of an asset, technical analysis attempts to determine future price movement by evaluating previous price movements. While many market participants believe that chart analysis does not provide an idea of what will happen in the future, there are also many proponents of technical analysis, especially among short-term traders.
One of the advantages of technical analysis is that, unlike fundamental analysis, many of the charts and tools that technical analysts use can be applied to any type of market. This means that while a technical analyst may have the advantage of focusing on certain markets, he nevertheless has far more flexibility than a fundamental analyst.
Regardless of whether you decide to focus on fundamental or technical analysis, remember that you should not rely on one of them with the complete exception of the other. Many fundamental analysts examine charts to determine entry and exit points to trade in the direction they have discovered through their research. Likewise, even the most avid chartists pay attention to important fundamental events. (Regardless of what the chart says, if a hurricane wipes out all of the major refineries, the price of oil is likely to rise because supply will decrease.)
Tools and Techniques
In addition to fundamental and technical analysis, there are many other tools and techniques that can aid in futures trading. The most important of these is risk management. As we discussed earlier, using leverage in futures trading increases both reward and risk. In order to avoid being thrown away by unexpected market rallies, private traders must practice strict risk management. This should include setting a stop loss level. This should be the level where you exit the trade and cut losses, regardless of whether you still believe in the original premise. Never forget the famous saying "Markets can remain irrational longer than you can remain solvent." Even if the initial premise is ultimately correct, irrational market movements can remain in place for much longer than they “should” and can drain all capital, especially when you are leveraging.
Often, traders place physical stop loss orders when they enter a trade. These orders should automatically trigger and stop losses if the market goes against the trader.
Note: Such orders are good to use, but it should be borne in mind that in very volatile markets they simply cannot be executed and the losses will be much larger than planned
The last important risk management tool is diversification. This means that you have to spread your capital across a series of small rates in the futures market. Remember investing is a marathon, not a sprint. Diversification also means that futures trading should not be your only investment program. In addition to your trading account, you need to have other, longer term investments supported in different styles using different market mechanisms.