Trading in the futures market is no more difficult than any other. You only need a little understanding of its features. And above all we should understand that futures and Commodity not quite the same.
If you believe that Commodity (commodities) and futures (futures) - the same thing, you have to disappoint you. This is not equivalent to the concept, although in some cases we can speak of Commodity, implying that futures, and vice versa. If you are not completely confused and are able to collect his thoughts - read our article. You will understand what these concepts are different and what are their similarities, in which cases the words "Commodity" and "futures" are synonymous, and in which - no.
Not everyone can be Commodity Futures
"What's so wrong?" - The astute reader may ask. Then he will open any dictionary and find about this translation: "public goods", "commodity" or even "product for sale." If he has at hand will be a specialized dictionary, it is likely he will find there is a definition as "commodity futures". However, none of these interpretations have every right does not apply to what is in question here - to Market Commodity. The paradox is that all are Commodity futures, but futures (example of this - the Russian stock futures) is not necessarily a Commodity. They may be on the same field, but their territory is different. Futures for the supply of currency, the total cost index for shares, the temperature, of course, are not Commodity. But in today's world of speculation going on mutation of concepts related to the fact that the modern speculator makes no difference what is the underlying asset for the futures contract. He sells future expectations. And as soon as the concept: underlying asset, the basic goods - subject to currency or a security or any obligation - so immediately, in the speculative understanding of these futures are seen as a Commodity. So in today's world the concept of Commodity, when viewed from this point - comprehensively! The reason for the recurring confusion among the public lies in the fact that domestic practice simply does not know such a concept, which is fully consistent with the notion of Commodity. There is nothing else left to do - can only accept. What is a Commodity? The answer can be brief: it is securitized forward contract for delivery of an asset. It usually requires brevity interested public. You can express and easier, though verbose: Commodity is the forward contract, which has a standardized form, namely, the exact description of what is delivered under this contract, an indication of the volume and the delivery month. Consequently, the futures contract has all the features of a financial instrument, and this is the "securitization". Chicago Mercantile Exchange (CBOT - Chicago Board of Trade) - the oldest in the United States - is actually the center of the modern market Commodity. Not so long ago, it celebrated its 150 anniversary (stock exchange was founded in 1848). However, the grain trade contracts began in the early 19 th century. But the story of a futures contract and knows the earlier examples - in 1710 on the rice market in the town of boosting (Japan) began to treat the rice coupons, which, no doubt, can be considered analogous to today's futures contracts. To whether something similar earlier? It is quite possible. In the process of market evolution arose a need for trade various financial instruments (rates, currencies, etc.) are not covered by the concept of physical goods. For similar tools were also released into circulation futures contracts. Since they were little different from ordinary commodities futures, they also have ranked in the market. And so it began the process leading to the expansion of the concept of "Commodity". Now he continues to evolve, and not without success. This eloquently shows, for example, are newly created instruments such as futures on the temperature.
Commodity Group
You can find many different options on the Commodity market share of the group or sector. Below is one of the options for such separation. It seems most appropriate current circumstances (there are futures contracts, which are traded on U.S. exchanges):
Grain: wheat (wheat), maize (corn), oats (oats), soy products (soybeans, soy oil, soy flour). Meat: livestock (live cattle), cattle (feeder cattle), pork (hogs), bacon (pork bellies). Metals: platinum (platinum), silver (silver), high brass (high-grade cooper), gold (gold). Colonial commodities: coffee (coffee), cocoa (cacao), sugar (sugar), orange juice (orange juice), cotton (cotton). Futures rates: Treasury bills (Treasure bonds), Treasury notes (Treasure bills), Treasury notes (Treasure notes), Eurodollar (Eurodollars), 30-day federal funds rate (30-day Federal Funds), LIBOR (LIBOR). Currency: Euro (Euro), Swiss Franc (Swiss franc), German mark (Deutsche Mark), British pound (British pound), Japanese yen (Japanese yen), Canadian dollar (Canadian dollar), Mexican peso (Mexican peso), Australian dollar (Australian dollar), the Russian ruble (Russian ruble). Futures on the indexes: S & P500 Stock Index, S & P MidCap 400 Stock Index, Nikkei 225 Stock Index, NASDAQ 100 Stock Index and the Goldman Sachs Commodity Index (Goldman Sachs Commodity Index), Index of Municipal Obligations (Municipal Bond Index), Index of the United States dollar (US Dollar Index). Futures on energy: crude oil (crude oil), fuel oil (heating oil No.2), neetelirovanny gazolayn (unleaded gasoline), natural gas (natural gas). Wood: timber (lumber).
As we already mentioned, you can find other options and naming groups of assets and their classification. For example, commodities such as coffee, cocoa, etc., can be defined as "Exotica". Can be identified separately and a group of agricultural commodities, which includes cereals, dairy and meat products, etc. Frankly, full and clear standards do not exist here. In any case, many questions are pretty vague answers.
Of course, this list is incomplete. Periodically, he replenished. In addition, the market is cruel: some products can not keep it and disappear from the list of traded contracts. This is precisely the fate futures, which tried to trade diamonds. While the idea itself is very attractive and the market feels the urgent need for this tool, futures contracts are not accustomed, as well as failed to provide proper standardization. The quality of diamonds is among the most sensitive. And no matter how good match specific criteria of purity, it is impossible to avoid the various "but".
So, the astute reader will have certainly noticed that the Commodity can be divided into two broad groups: first, futures on physical commodities and, secondly, futures, traded on subsistence groups. Futures on commodities have long been known, the main ones mentioned above. By subsistence groups include indexes, currencies, rates. Sometimes there is also something quite so exotic - of course, only at first glance. A suitable example of this - all the same futures on the temperature. How viable will this project, time will tell.
Futures: three major misconceptions
As practice shows, the vast majority of investors, having heard the definition of futures, come just horrified. I mean about this definition: "A futures contract is an obligation to buy or sell a commodity at a set price with his delivery on time in the future. The price is fixed at the conclusion of the contract in the course of trading on the respective stock exchange. In all likelihood, the most impressive is the word "commitment", which is not always mellifluous. But the idea of futures as a cruel and vicious beast of the market - pure delusion. Here's why.
First, what makes buyers and sellers enter into futures contracts? Usually doing it in the event that there is no need for immediate delivery of the goods, but at the same time, it is desirable to protect themselves from the risk of price fluctuations. The reason is simple: neither the manufacturer nor the consumer is not interested in excessive price fluctuations in commodity around which to focus their interests. Therefore they will be out to forecast prices, which is essential for production. To this end, in fact, was created Commodity Market.
Secondly, it is obvious that the obligation to deliver the goods will surely perform. Today's markets suggest that this method of operation in which both the buyer and the seller always have a choice: to remain in position or leave the trade. How achievable is the desire and the opportunities to make a deal at the best price - defined concepts such as liquidity. The higher the liquidity, the better conditions for trade. Conversely, the lower it, the worse the trade in the market. This is confirmed by the statistics: only 4-7% of futures contracts actually reached prior to delivery.
And, finally, the third misconception is that the futures price reflects the future price of the delivered goods. In reality, the current price of an asset traded on the futures with the condition of delivery by a certain date in the future exactly nothing to do with what will be the price at the time of the alleged delivery. In other words, if today the March futures on the Euro is traded, say, 0.9500, this does not mean that in March it will cost as much. Nor does it mean that the euro will cost by 0.100 more than at present, although the current cash rate of the currency is 0.9400 (0.9500-0.9400 = 0.100).
The real value of the futures price is determined by the cost of storage and insurance of the goods, as well as the level of interest rates. As the underlying asset appears goods (eg oil, gas, silver, etc.) or a financial instrument (index, currency, etc.), having one way or another definite value. This focus on the spot market price and allows you to find out how much it costs futures. Changing the spot market price will automatically entail a change in the value of the futures. Generally, all this looks like a dog that tries to catch up with their own tails. After the change of futures prices often entails spot market fluctuations. In connection with this constantly ongoing debate about what is more important - futures or cash price? Which one is leading and who is slave? It is unlikely that there is a definite answer to this question.
Quite different is the case with the question: "And what is the price dynamics of futures and spot market, and whether there is a link between them?" Here, two opinions can not be - the dynamics are the same! Then there is another question: "Is there a difference between the way an instrument trading: futures or cash commodity?" By and large, there is no difference whatsoever. Differ only in terms of trade for each of the following: the amount of money necessary for the transaction, the existence of costs for storage, the magnitude of associated transaction costs and trading losses from the price difference between sellers and buyers, the duration of access to markets for trade and so on.
The options and types of possible situations
In fact, we are faced with the choice between alternatives. In the end, everything is determined by comparing these options. Clearly, in the case of trade in physical goods will be an advantage on the side of the futures, if only the real goods do not need this very minute. The cost of conservation futures roughly corresponds to loss of profits from investments in bonds of the margin, which is employed for the position. For everything else - speculative gains and losses. And so it is natural that it is convenient to operate futures on some tons, barrels, or bushel, than most marketable weight, which must be stored somewhere. But if the basis for futures on the financial assets, the situation is complicated - especially if the alternative trading on various markets (Commodity and cash) is competitive, as in the case of currencies. Futures on the indexes and rates are widely used in programs cover the risk and create arbitrage strategies for this very reason - the availability of options.
The case of currency futures in general, particularly since these futures to some extent compete with the market of cash currency exchange operations - Forex. So, here is a good opportunity to outline what the arbitration, and try to understand what path to follow in choosing options market trading. A trader in the Forex market is a daily pay or receive interest rate swap. The trader, operating in futures is not related to this need. But he faces a situation in which the contract is the price different from the price in the cash market, that is - at a premium. Its value depends on the level of interest rates and delivery futures. Under normal circumstances, futures traded above cash market. Such a situation called contango (contango). But sometimes occur and reversible cases: develops abnormal situation in which the underlying asset is higher than futures. This condition is called bekvordeyshn (backwardation), or backwardation. Whatever were related futures and cash markets, their prices are sure to converge to the date of delivery for futures or, if the futures contract is not deliverable (indices, currency rates) - to the day of settlement of all of these situations really are a trader a good help because they provide him with additional information about the market. On the use of such situations are constructed many trading strategies. A mechanism for arbitration in the presence of viable alternatives (such as in the case of currency futures) futures makes a very sensitive tool, thereby providing flow to the market speculators to create liquidity.
So, it is clear that the ordinary trader is not necessary to deeply understand all the set of problems related to the definition of futures price and its value at the time of the expiration of the designated period. If the market is liquid, then its price fluctuations will occur in the same way as in any other market. As a consequence, the behavior of a trader, if its purpose is merely speculation, can not and should not be different from the action in any given market. But if the trader intends to ensure the supply of cash goods, there is, of course, entirely different situation, which in this article is not speech.
How to trade on Commodity?
On the Commodity trade the same way as in any other market. Virtually no difference. The sequence is simple: 1) open an account with a broker, which serves markets of interest, 2) transferred the money to ensure the margin (they can be provided in the form of bonds), 3) begins trading. Trading on Commodity several distinctive features that you should know before starting the transaction. First of all, must obtain at least a superficial understanding of the intended sale to the contract. Required information on this subject are set out in the contract specification. After at least clarified the date of delivery (if you think that traders are rarely included in long-term position on the futures, which expire in just a few days, something deeply wrong), you can begin to market analysis. Commodity market analysis is not fundamentally different from the analysis on other markets. It should be noted that technical analysis was created specifically for this market and only then was moved to other markets - stocks, currencies, bonds. But even if the trader pure "geek", not recognizing anything other than technical analysis, it should still meet with the news, as well as find out when the expected news concerning the interests of its market. Ways to send orders to brokers to market Commodity varied: on the phone, via Web-browser (the usual Web), as well as through special programs developed by brokers to their clients. I must honestly admit: all the technology of direct access, incoming now in vogue in the securities market, the Commodity has been used for a long time ago and do not represent any particular innovation. Another question - how different are their capabilities and powerful. But the indisputable fact remains that the technology of direct access were first "run" it on the market Commodity.
Some features of this market segment
The important fact is that the margin requirements on futures markets significantly more liberal than in other markets. Perhaps the only rival is the Forex market. If you do not focus on the tremendous financial leverage, you can find out what their margin requirements are very similar between the Forex and Commodity.
If you believe that Commodity (commodities) and futures (futures) - the same thing, you have to disappoint you. This is not equivalent to the concept, although in some cases we can speak of Commodity, implying that futures, and vice versa. If you are not completely confused and are able to collect his thoughts - read our article. You will understand what these concepts are different and what are their similarities, in which cases the words "Commodity" and "futures" are synonymous, and in which - no.
Not everyone can be Commodity Futures
"What's so wrong?" - The astute reader may ask. Then he will open any dictionary and find about this translation: "public goods", "commodity" or even "product for sale." If he has at hand will be a specialized dictionary, it is likely he will find there is a definition as "commodity futures". However, none of these interpretations have every right does not apply to what is in question here - to Market Commodity. The paradox is that all are Commodity futures, but futures (example of this - the Russian stock futures) is not necessarily a Commodity. They may be on the same field, but their territory is different. Futures for the supply of currency, the total cost index for shares, the temperature, of course, are not Commodity. But in today's world of speculation going on mutation of concepts related to the fact that the modern speculator makes no difference what is the underlying asset for the futures contract. He sells future expectations. And as soon as the concept: underlying asset, the basic goods - subject to currency or a security or any obligation - so immediately, in the speculative understanding of these futures are seen as a Commodity. So in today's world the concept of Commodity, when viewed from this point - comprehensively! The reason for the recurring confusion among the public lies in the fact that domestic practice simply does not know such a concept, which is fully consistent with the notion of Commodity. There is nothing else left to do - can only accept. What is a Commodity? The answer can be brief: it is securitized forward contract for delivery of an asset. It usually requires brevity interested public. You can express and easier, though verbose: Commodity is the forward contract, which has a standardized form, namely, the exact description of what is delivered under this contract, an indication of the volume and the delivery month. Consequently, the futures contract has all the features of a financial instrument, and this is the "securitization". Chicago Mercantile Exchange (CBOT - Chicago Board of Trade) - the oldest in the United States - is actually the center of the modern market Commodity. Not so long ago, it celebrated its 150 anniversary (stock exchange was founded in 1848). However, the grain trade contracts began in the early 19 th century. But the story of a futures contract and knows the earlier examples - in 1710 on the rice market in the town of boosting (Japan) began to treat the rice coupons, which, no doubt, can be considered analogous to today's futures contracts. To whether something similar earlier? It is quite possible. In the process of market evolution arose a need for trade various financial instruments (rates, currencies, etc.) are not covered by the concept of physical goods. For similar tools were also released into circulation futures contracts. Since they were little different from ordinary commodities futures, they also have ranked in the market. And so it began the process leading to the expansion of the concept of "Commodity". Now he continues to evolve, and not without success. This eloquently shows, for example, are newly created instruments such as futures on the temperature.
Commodity Group
You can find many different options on the Commodity market share of the group or sector. Below is one of the options for such separation. It seems most appropriate current circumstances (there are futures contracts, which are traded on U.S. exchanges):
Grain: wheat (wheat), maize (corn), oats (oats), soy products (soybeans, soy oil, soy flour). Meat: livestock (live cattle), cattle (feeder cattle), pork (hogs), bacon (pork bellies). Metals: platinum (platinum), silver (silver), high brass (high-grade cooper), gold (gold). Colonial commodities: coffee (coffee), cocoa (cacao), sugar (sugar), orange juice (orange juice), cotton (cotton). Futures rates: Treasury bills (Treasure bonds), Treasury notes (Treasure bills), Treasury notes (Treasure notes), Eurodollar (Eurodollars), 30-day federal funds rate (30-day Federal Funds), LIBOR (LIBOR). Currency: Euro (Euro), Swiss Franc (Swiss franc), German mark (Deutsche Mark), British pound (British pound), Japanese yen (Japanese yen), Canadian dollar (Canadian dollar), Mexican peso (Mexican peso), Australian dollar (Australian dollar), the Russian ruble (Russian ruble). Futures on the indexes: S & P500 Stock Index, S & P MidCap 400 Stock Index, Nikkei 225 Stock Index, NASDAQ 100 Stock Index and the Goldman Sachs Commodity Index (Goldman Sachs Commodity Index), Index of Municipal Obligations (Municipal Bond Index), Index of the United States dollar (US Dollar Index). Futures on energy: crude oil (crude oil), fuel oil (heating oil No.2), neetelirovanny gazolayn (unleaded gasoline), natural gas (natural gas). Wood: timber (lumber).
As we already mentioned, you can find other options and naming groups of assets and their classification. For example, commodities such as coffee, cocoa, etc., can be defined as "Exotica". Can be identified separately and a group of agricultural commodities, which includes cereals, dairy and meat products, etc. Frankly, full and clear standards do not exist here. In any case, many questions are pretty vague answers.
Of course, this list is incomplete. Periodically, he replenished. In addition, the market is cruel: some products can not keep it and disappear from the list of traded contracts. This is precisely the fate futures, which tried to trade diamonds. While the idea itself is very attractive and the market feels the urgent need for this tool, futures contracts are not accustomed, as well as failed to provide proper standardization. The quality of diamonds is among the most sensitive. And no matter how good match specific criteria of purity, it is impossible to avoid the various "but".
So, the astute reader will have certainly noticed that the Commodity can be divided into two broad groups: first, futures on physical commodities and, secondly, futures, traded on subsistence groups. Futures on commodities have long been known, the main ones mentioned above. By subsistence groups include indexes, currencies, rates. Sometimes there is also something quite so exotic - of course, only at first glance. A suitable example of this - all the same futures on the temperature. How viable will this project, time will tell.
Futures: three major misconceptions
As practice shows, the vast majority of investors, having heard the definition of futures, come just horrified. I mean about this definition: "A futures contract is an obligation to buy or sell a commodity at a set price with his delivery on time in the future. The price is fixed at the conclusion of the contract in the course of trading on the respective stock exchange. In all likelihood, the most impressive is the word "commitment", which is not always mellifluous. But the idea of futures as a cruel and vicious beast of the market - pure delusion. Here's why.
First, what makes buyers and sellers enter into futures contracts? Usually doing it in the event that there is no need for immediate delivery of the goods, but at the same time, it is desirable to protect themselves from the risk of price fluctuations. The reason is simple: neither the manufacturer nor the consumer is not interested in excessive price fluctuations in commodity around which to focus their interests. Therefore they will be out to forecast prices, which is essential for production. To this end, in fact, was created Commodity Market.
Secondly, it is obvious that the obligation to deliver the goods will surely perform. Today's markets suggest that this method of operation in which both the buyer and the seller always have a choice: to remain in position or leave the trade. How achievable is the desire and the opportunities to make a deal at the best price - defined concepts such as liquidity. The higher the liquidity, the better conditions for trade. Conversely, the lower it, the worse the trade in the market. This is confirmed by the statistics: only 4-7% of futures contracts actually reached prior to delivery.
And, finally, the third misconception is that the futures price reflects the future price of the delivered goods. In reality, the current price of an asset traded on the futures with the condition of delivery by a certain date in the future exactly nothing to do with what will be the price at the time of the alleged delivery. In other words, if today the March futures on the Euro is traded, say, 0.9500, this does not mean that in March it will cost as much. Nor does it mean that the euro will cost by 0.100 more than at present, although the current cash rate of the currency is 0.9400 (0.9500-0.9400 = 0.100).
The real value of the futures price is determined by the cost of storage and insurance of the goods, as well as the level of interest rates. As the underlying asset appears goods (eg oil, gas, silver, etc.) or a financial instrument (index, currency, etc.), having one way or another definite value. This focus on the spot market price and allows you to find out how much it costs futures. Changing the spot market price will automatically entail a change in the value of the futures. Generally, all this looks like a dog that tries to catch up with their own tails. After the change of futures prices often entails spot market fluctuations. In connection with this constantly ongoing debate about what is more important - futures or cash price? Which one is leading and who is slave? It is unlikely that there is a definite answer to this question.
Quite different is the case with the question: "And what is the price dynamics of futures and spot market, and whether there is a link between them?" Here, two opinions can not be - the dynamics are the same! Then there is another question: "Is there a difference between the way an instrument trading: futures or cash commodity?" By and large, there is no difference whatsoever. Differ only in terms of trade for each of the following: the amount of money necessary for the transaction, the existence of costs for storage, the magnitude of associated transaction costs and trading losses from the price difference between sellers and buyers, the duration of access to markets for trade and so on.
The options and types of possible situations
In fact, we are faced with the choice between alternatives. In the end, everything is determined by comparing these options. Clearly, in the case of trade in physical goods will be an advantage on the side of the futures, if only the real goods do not need this very minute. The cost of conservation futures roughly corresponds to loss of profits from investments in bonds of the margin, which is employed for the position. For everything else - speculative gains and losses. And so it is natural that it is convenient to operate futures on some tons, barrels, or bushel, than most marketable weight, which must be stored somewhere. But if the basis for futures on the financial assets, the situation is complicated - especially if the alternative trading on various markets (Commodity and cash) is competitive, as in the case of currencies. Futures on the indexes and rates are widely used in programs cover the risk and create arbitrage strategies for this very reason - the availability of options.
The case of currency futures in general, particularly since these futures to some extent compete with the market of cash currency exchange operations - Forex. So, here is a good opportunity to outline what the arbitration, and try to understand what path to follow in choosing options market trading. A trader in the Forex market is a daily pay or receive interest rate swap. The trader, operating in futures is not related to this need. But he faces a situation in which the contract is the price different from the price in the cash market, that is - at a premium. Its value depends on the level of interest rates and delivery futures. Under normal circumstances, futures traded above cash market. Such a situation called contango (contango). But sometimes occur and reversible cases: develops abnormal situation in which the underlying asset is higher than futures. This condition is called bekvordeyshn (backwardation), or backwardation. Whatever were related futures and cash markets, their prices are sure to converge to the date of delivery for futures or, if the futures contract is not deliverable (indices, currency rates) - to the day of settlement of all of these situations really are a trader a good help because they provide him with additional information about the market. On the use of such situations are constructed many trading strategies. A mechanism for arbitration in the presence of viable alternatives (such as in the case of currency futures) futures makes a very sensitive tool, thereby providing flow to the market speculators to create liquidity.
So, it is clear that the ordinary trader is not necessary to deeply understand all the set of problems related to the definition of futures price and its value at the time of the expiration of the designated period. If the market is liquid, then its price fluctuations will occur in the same way as in any other market. As a consequence, the behavior of a trader, if its purpose is merely speculation, can not and should not be different from the action in any given market. But if the trader intends to ensure the supply of cash goods, there is, of course, entirely different situation, which in this article is not speech.
How to trade on Commodity?
On the Commodity trade the same way as in any other market. Virtually no difference. The sequence is simple: 1) open an account with a broker, which serves markets of interest, 2) transferred the money to ensure the margin (they can be provided in the form of bonds), 3) begins trading. Trading on Commodity several distinctive features that you should know before starting the transaction. First of all, must obtain at least a superficial understanding of the intended sale to the contract. Required information on this subject are set out in the contract specification. After at least clarified the date of delivery (if you think that traders are rarely included in long-term position on the futures, which expire in just a few days, something deeply wrong), you can begin to market analysis. Commodity market analysis is not fundamentally different from the analysis on other markets. It should be noted that technical analysis was created specifically for this market and only then was moved to other markets - stocks, currencies, bonds. But even if the trader pure "geek", not recognizing anything other than technical analysis, it should still meet with the news, as well as find out when the expected news concerning the interests of its market. Ways to send orders to brokers to market Commodity varied: on the phone, via Web-browser (the usual Web), as well as through special programs developed by brokers to their clients. I must honestly admit: all the technology of direct access, incoming now in vogue in the securities market, the Commodity has been used for a long time ago and do not represent any particular innovation. Another question - how different are their capabilities and powerful. But the indisputable fact remains that the technology of direct access were first "run" it on the market Commodity.
Some features of this market segment
The important fact is that the margin requirements on futures markets significantly more liberal than in other markets. Perhaps the only rival is the Forex market. If you do not focus on the tremendous financial leverage, you can find out what their margin requirements are very similar between the Forex and Commodity.
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