Futures trading systems analyze commodity markets and use futures contracts to trade. Different types of systems attempt to capitalize on market conditions, including long-term, short-term, day trading, spread trading, and seasonal trades. Technical and fundamental analysis are used to develop these systems. Investors should research a system’s track record before investing and consider developing their own system through hands-on research and testing.
Futures trading systems are based on the analysis of commodity markets. Commodities are traded on regulated exchanges and futures contracts are the means by which they are traded. Different types of futures trading systems attempt to capitalize on market conditions. Trading systems are developed to give the investor an edge over other market participants. The main categories of futures trading systems are long term, short term and day trading.
Most futures traders are speculators and most futures trading systems are designed to speculate on the price action of an underlying asset. Technical and fundamental analysis of commodities leads to futures trading systems. Technical systems can be based on graphical patterns and indicators. Fundamental systems could be related to seasonality, weather conditions, and supply and demand issues.
Day trading systems are usually based on technical analysis. This form of analysis results in systems developed to capitalize on intraday price swings of heavily traded futures contracts. Major indices are often traded using indicators such as moving averages, Fibonacci retracements and chart studies. Day traders use charts and price scales with time frames as small as a tick.
Long-term investors generally use futures trading systems based on fundamental analysis. This form of analysis may include some reports published weekly. The positions of commercial and large speculators are reported and can be traced. This information can be a useful tool for the investor interested in following the big money.
Many professional traders use a system called spread futures trading. This type of system involves trading one futures contract against another. Spread trades are subject to less volatility than outright futures trades. Reduced margin rates are provided due to the reduced risk of spread trading. Intra-market spreads involve trading the same commodity in different contract months. Spread trading often makes use of seasonal analysis.
The natural supply and demand cycles of commodities are traded as seasonal trades. Historical commodity prices are tracked and traced, providing a seasonal method to determine supply and demand. While past performance isn’t always a guide to future results, the seasonal analysis proves correct most of the time. Heating oil is a good example of a seasonal trade. The demand for heating oil is obviously greatest during the winter months.
Long-term traders might use weather reports and conditions when trading agricultural commodities. The annual corn harvest could be affected by drought conditions. This could result in a decrease in corn supply, which would tend to raise prices for the available supply. This in turn could raise livestock prices because feed prices will rise. Many commodity markets are interconnected.
Other types of futures trading systems could include algorithmic trading also known as automated trading. The high-speed trading program is often used by large traders such as investment banks and hedge funds. Computer programs could enter thousands of trades with a profit of a few cents per trade. This type of trading is claimed to add liquidity to the markets.
Futures trading systems can be rented, purchased or provided by futures brokers. You should always research a system’s track record before investing your capital. It is recommended to exchange paper. The best trading system is one researched and developed by the individual investor. There is no substitute for the “hands-on” research, development and testing of a commercial system.
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