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May 6, 2013 by Leave a Comment

Beyond the “Spotlight”

For the Week of May 06, 2013

The GBE Trade Spotlight advisory service applies the GBE trading methodology (buying or selling commodity contracts based on breakouts of chart formations and technical indicators) to identify one to two trade setups per week.

Highlighting This Week’s Potential Breakouts:

June 2013 Live Cattle

The June 2013 Live Cattle contract closed below a lower trend line on Friday. There are touches on the trend line at 119.425 (4/16/13), 120.400 (4/22/13), and 121.675 (5/01/13). The Trend Seeker (a US Chart Company tool to help identify market trend) is Neutral, with a Bearish ranking. The MACD, a trend indicator, is bearish, but below the baseline and rising. Until the Trend Seeker changes to a Downtrend, there is no entry trigger. Perhaps it will take the contract to trade through a recent low of 121.675 (5/01/13). A potential sell entry could be on a retracement to the upward sloping trend line. Potential stop losses can go above recent resistance, the high of 124.550 (4/01/13). A potential downside target is the twelve month contract low of 119.375 (4/15/13).

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July 2013 Coffee

Coffee futures continues its sideways trading action since mid-March. The July 2013 contract’s Channel Formation is defined by the high of 144.50 (4/22/13) and the low of 132.70 (4/29/13). The Trend Seeker (a US Chart Company tool to help identify market trend) is Bearish, with a Weak ranking. The MACD indicator is bullish, below the baseline. Perhaps the market has finally made its low after selling off the past year. A 20-day Exponential and 50-day Simple Moving Average are converging. The same is happening with the Stochastic indicator. A close above the top of the Channel, with Trend Seeker changing to an Uptrend and other technical indicators agreeing, will trigger an entry to the upside. If the market continues selling-off, than a close below the bottom of the channel, with the technical indicators agreeing, will trigger an entry to the downside.

dd-bts2

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Additional Disclosures
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
Filed Under: Beyond the "Spotlight", Market Analysis, Trading Tips Tagged With: , , , , , , , ,
July 2, 2011 by 1 Comment

Proof that You Know More about Commodity Futures than You Think

Depending on who you are talking to, the term “commodity futures” always seems to generate a range of strong opinions. Sometimes it is met with fear: “I have an interest but I’m not comfortable with the risk and reward aspects”. At other times the term triggers optimism: “My buddy made a fortune trading commodities and I want to learn how he did it!” However, more commonly, the term “commodity futures” generates a bewildered, perplexed, where-do-I run-for-the-exit state of mind: “I don’t have any idea about how those work,” and thus, “I’m not interested in learning anything more about it”. This article is meant for those who fall into this third category. I am going to prove that you already know more than you think and that the learning curve is really a molehill, not a mountain.

Most of you probably pick up a newspaper or surf the web along with your morning coffee. Let’s start our discussion with this in mind, since you are already reading about what makes the world go ‘round. You are just not thinking about these stories as tradable opportunities. Gas Prices. Weather. Inflation. Political instability. Natural disasters. These are just a handful of headlines that you might read about on a daily basis.  The point is, the news you read about has a direct effect on the prices of commodity futures. Furthermore, these are very real, tradable opportunities.  Have I caught your interest yet?

A common term you will hear referred to is “seasonality”. When I refer to seasonality, I am not referring to the amount of seasoning that you put on your steak. Rather, I am referring to seasonal trends that many commodity markets tend to repeat year after year.  Here is an example of a continuous front month chart for RBOB Gasoline – the most heavily traded gasoline contract:

Gasoline RBOB (NY MEX) - Monthly OHLC Chart

Gasoline RBOB (NY MEX) - Monthly OHLC Chart

Please click to view the Historic Price Move risk disclosure below.

Why is it that Gasoline tends to increase in late spring and early summer? As we can see in the chart above, the market has choppy periods, but year after year it reaches its peak in these warm-weather months. The Law of Supply and Demand tells us that if more people are driving during warm weather months and, ceteris paribus, the supply of Crude Oil remains constant, prices should trend upwards. There is a substantial amount of risk in taking a position in this and all other commodity markets, and one should carefully consider the risks and the rewards prior to taking any leveraged positions. Here at Daniels Trading, we help you to formulate this type of strategy in such a way that you are comfortable and confident in your reasoning for why you are entering a trade.

While this gasoline example can be seen as a longer term trade, let’s look at how you can potentially benefit from shorter term moves in a market that everyone is familiar with – Crude Oil. As you may have heard, on June 23rd, President Obama tapped the nation’s “Strategic Petroleum Reserve”. The summary of this surprise announcement was essentially that there would be an additional 30 million barrels of oil introduced to the marketplace over the span of the next month. As you might have already guessed, a sudden increase of supply sent a shockwave through the market. Have a look at the chart below:

Crude Oil WTI (NY MEX) - Daily OHLC Chart

Crude Oil WTI (NY MEX) - Daily OHLC Chart

The Crude Oil market sold off strongly on this news. For those who are not already aware, commodity traders can speculate on a bearish market just the same way that they would if they were bullish on a given market. In other words, you can potentially benefit from falling commodity prices just as you would by buying low and selling high.

You will note that Crude rebounded strongly on June 29th. If you are a client of Daniels Trading and are receiving our daily “Insider Market Advisory”, you would have been prepared for this as you were made aware of the easing Greek debt default fears, a weaker US dollar, and reduced inventory numbers. If you are not a client of Daniels Trading and would like to see how this service can potentially benefit you, sign up for a complimentary trial here.

In conclusion, if you started reading this brief article with the mindset that “you don’t know enough about commodities to trade them”, you should hopefully now see that you do in fact know more than you think. Trading is by no means easy and it is not right for everyone, but with some common sense and a few valuable resources like the IMA and our DT Pro trading software, you can be prepared to participate in these markets if the right opportunity should present itself. If you need help managing risk, consider working with a Daniels Trading broker who can get to know you better.

Download our free eBook: How to Make Your First Futures Trade!

If you have always wanted to get involved in the commodity market but were unsure how, this guide will turn that mountain into a molehill.  Order the free eBook "How To Make Your First Futures Trade" today!

Historic Price Move Risk Disclosure:  Examples of historic price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or are likely to occur.

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Filed Under: Getting Started Tagged With: , , , , , ,
June 24, 2011 by Leave a Comment

I Understand Stocks, But What About Futures?

I was at a party the other night when someone asked me what I do for a living.  I responded that I was a commodities broker.  This spurred them to ask, “What is exactly is that?  I understand stocks but what are commodities?” This is a question that I have faced several times and I gave my usual response, “I work with traders and investors who wish to participate in the commodities markets to speculate on price fluctuation and market volatility.” This person pressed me on my response, so I went into some more detail explaining how I work with traders that use the futures and options markets as a way to speculate on the price movement of commodities.

I have this conversation with people more times than not.  People are always looking for a way to increase their wealth through their understanding of world events.  They are told to save for their future and the best way to do this is through investing in stocks and bonds.  As they have some success with this, some seek to learn more about the markets and actually try to expand on their understanding of economic activity.  Many look to the futures markets but get intimidated when they see the symbols, prices, and terminology.  Further, they hear stories of extreme volatility in the futures market and believe that they can lose money quickly.  At this point, any interest they have turns to apprehension as they don’t want to invest resources in something that they don’t understand.

However, learning a couple basic concepts can ease ones fears and possibly open a door to new opportunities in the futures markets.  I often let people know that they already know more than they think.  Through the knowledge they already acquired about the stock market, they already have a solid base toward understanding the futures markets.  And while trading and investing can be extremely challenging, education and knowledge play a key role in success.  But where does one start?

Step 1:  Understand the similarities between stocks and commodity futures

Stocks and commodities are both assets that have value.  Furthermore, both are tradable goods that have a value that is set in the market.  A stock or a commodity futures price is set when a buyer and seller agree to trade.  This asset (be it IBM, Google, gold, or corn) will either rise in price or trade lower depending on supply and demand fundamentals.  Markets are fluid and constantly moving.  Technical and fundamental analysis in the stock market is no different than in the futures markets.  In most cases, dealing with commodity futures offers the trader more macroeconomic exposure to the market.  For example, if a trader thinks that the stock market will go up, he may decide to purchase shares of General Electric or an S&P futures contract.  By purchasing the S&P futures contracts the trader has a more direct exposure to the price swings of the overall stock markets than if he simply purchased one stock.

Step 2:  Understand the differences between futures and stocks

There are some definite differences between trading stocks and trading futures.  While many are intimidated by these differences, understanding a few principals can ease most of the tension.  Below are some common differences that are easy to understand with a little research.

A company value is reflected in its stock price and commodity futures values are derived from the underlying price of the commodity: A stock is simply a partial ownership of a company.  The value of the stock is reflected in its price.  This is considered and investment because an investor is seeking to receive a return on his capital.  A commodity future derives its value from the underlying commodity.  A trader will either buy or sell the futures contract based on his expectation of the price of the commodity.  For example, a trader that expects the price of gold to rise due to inflationary pressure would purchase a gold future.  Whereas a stock is traded for dividend and market growth, one trades a commodity future on expected price action.

Delivery months: Each contract with futures has a delivery month, and the delivery months vary from contract to contract.  Most traders use the “front month” as the month that they decide to trade.  However, a trader can decide to trade any month listed on the exchange.  The different months represent when the contract will be exchanged for the physical commodity.  For example, a November 2011 soybean future will expire and be set for delivery on November 17th.  Any trader holding this contract after this date will be subject to delivery of the commodity.

Pricing:  Each contract has different pricing.  For example, soybeans are traded in ¼ cents, gold is traded in 10 cent increments, and the ten year note is traded in points and 32nds.  A simple and quick conversion is all that is needed to establish the price, cost, and value of each contract.  This can be found on the Daniels Trading website.

Futures Calculator

Futures Calculator – Use our dt Futures Calculator to quickly establish your potential profit or loss on a futures trade.  This easy-to-use tool can be used to help you figure out what you could potentially make or lose on a trade or determine where to place a protective stop-loss order/limit order to capture your profit.

Please click to view the Stop/Loss Orders risk disclosure below.

Margin/leverage:  When trading futures the trader is generally not paying the full price of the commodities value.  The trader is putting up a portion of the total value of the contract (the minimum amount is called the margin requirement; this is set by the exchanges and is different for each contract).  For example, if Dec 2011 corn is trading at $7.00, then the full value of the contract is $35,000.  However, the margin required to trade this contract is roughly $2,400.00.  The margin is set to guard against an adverse price move of one’s position in the futures contract.  The trader is placing a smaller amount of the total value of the contract in order to “leverage” his exposure to the commodity future.  Many traders enter the market looking only at the margin when establishing a position.  While this is essential to trading, understanding the total value of the contract is equally important.  By not properly using margin and leverage, a trader can easily encounter issues with his account and be subject to a margin call.  For example, a trader who has $13,500 in his account may decide to purchase two gold futures.  The margin for gold is $6,750 and the maintenance margin is $5,000.  If gold declines in price over $17.50 a contract, the traders account will be subject to a margin call.  This means that either more money must be added to the account or the position will be liquidated.

Margin Requirements

Margin Requirements – View our latest Margin Requirements.  We always offer exchange minimum margins with reduced daytrading margins.  Subject to change based on market conditions and exchange guidelines.

Please click to view the Margins and Leverage risk disclosure below.

Summary

While it’s true that there are definitely some differences between stocks and commodity futures, understanding each takes studying and research.  To take advantage of the markets, one needs a good idea, sufficient capital, proper risk management, and solid execution.  Although commodity futures are not right for everyone and every situation, but by understanding the basics of the market a trader or investor opens the door to new opportunities.  And in the end, that’s all anyone can really ask for.

Free eBook:  “Futures for Stock Traders”

This guide compares stocks vs. futures trading and will show you how, if you understand stock trading, you can easily make the transition to futures trading!  Download your free guide and get started.

Stop/Loss Orders Risk Disclosure:  STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE.  IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A “LIMIT MOVE”, IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.

Margins and Leverage:  THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL.  THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS.  THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.

Filed Under: Getting Started Tagged With: , , ,
March 31, 2011 by Leave a Comment

Hedging with Commodity Futures: It’s All About Managing Price Risk!

Part Two:  A User’s Perspective

The goal of hedging is to transfer price risk from one party to another.  You may remember this from the initial article I wrote on hedging.  This article will focus on how users of a product can roughly lock in a price to transfer risk to another party.  If you would like to learn more about how a producer can roughly lock in a price, read my previous article here:  Hedging with Commodity Futures:  It’s All About Managing Price Risk!

Why should I hedge?

This is the question you will have to ask yourself when trying to figure out the benefits of hedging.  As a user, would you like to be able to roughly determine the price you will have to pay for a commodity in the future? The futures markets can help you do this.

Cash – Futures = Basis!

This is a very important formula to remember.  Basis is the difference between the cash price and the futures price of a commodity.  Basis consists of carrying charges and costs of transportation for the commodity to an exchange approved delivery point.  For example, if the cash corn market is at $6.93 and the futures price is $7.00, the basis would be -.07 (6.93-7.00).  As the delivery month draws near and the prices converge, basis approaches zero.

There are two types of hedges, long hedges and short hedges.  This article focuses on long hedges.  Someone who is buying the commodity later in the cash market is a long hedger.  A long hedger is someone who wants to protect themselves from price increases (user).  A long hedge is also known as being “Short the basis.” A hedger who is short the basis (long hedger) benefits from the basis becoming more negative.  In the corn example above, if it was a long hedger, he would want the basis to get more negative.

To sum it up, a long hedger wants to protect against increasing prices and benefits when basis weakens.

Real-World Example

A feed company will need to buy 25,000 bushels of corn on December 1st.  Due to rising per capita incomes around the world, the feed company believes that increased demand for feed grain and food could result in an increase in corn prices.  The company decides to place a long hedge on March 23rd to protect themselves from rising prices.  December corn futures are currently trading at $6.15/bu and the December cash market is currently at $5.83/bu.  Each corn futures contract contains 5,000 bushels.  The feed company buys five corn futures contracts at $6.15/bu.  The feed company’s goal is to lock in a price of roughly $5.83/bu for corn.

It is now November 30th and the feed company’s concern that corn prices would rise held true.  Corn futures are currently at $7.58/bu and December cash corn is at $7.46/bu.  The company exits its futures positions and buys the cash grain.  See the table below for the sum of the transactions.

Change in Basis

Date Cash Futures Basis
03/23/11 5.83 6.15 -.32
11/30/11 7.46 7.58 -.12
= -1.63 = + 1.43 = -.20

The feed company lost $1.63 on the cash side and gained $1.43 on the futures side.  The net result of the hedge is a loss of 20 cents per bushel.

- 0.20/bu
X 5000 bu/contract
$-1000
X 5 contracts
$-5000 loss in dollars

The net price paid for the corn is calculated by subtracting the change in futures to the cash price at which the grain was sold.

Cash Price Received:    $7.46/bu
Gain on Futures:    -1.43 (reduces cost)
   $6.03/bu

-OR-

Target Price:    $5.83/bu
Adjusted by net result:    +0.20
   $6.03/bu

Basis strengthened during the hedge, causing the feed company to pay more than they had hoped.  Remember that the goal of hedging is to transfer price risk and set the price you would like to pay in a roughly determinable range.  Had the feed company not hedged, they would have been stuck paying $7.46/bu of corn!  This is quite a large difference from the $6.03 they actually paid.

Add Hedging To Your Plan

Hedging is a great risk management tool.  Yes, the corn prices in the example could have decreased and the feed company would have lost money in futures, but they would have paid less for the cash grain.  If that was the case, a producer could have benefitted by placing a short hedge!  Remember, the goal of hedging is to transfer price risk and set the prices one will receive or pay within a roughly determinable range.  Reducing exposure to market surprises allows users and producers to plan their operations more confidently.

Receive a Free Trial Subsciption to the “Daniels Ag Advisory” Newsletter

If you enjoyed this article, please sign up for a free subscription to “Daniels Ag Advisory” newsletter.  This exclusive grain market trading resource is reviewed daily by both individual and professional agricultural commodity traders alike.  Published by renowned grain trader, Andy Daniels, the Daniels Ag Advisory newsletter provides you with real-time advice from an expert with well over 25 years of day-to-day trading experience!

Filed Under: Hedging, Risk, Strategies Tagged With: , , , , , ,
February 28, 2011 by Leave a Comment

Hedging with Commodity Futures:  It’s All About Managing Price Risk!

This post originally appeared in FutureSource’s Fast Break Newsletter on February 25, 2011, where Drew Wilkins is a regular contributor on various futures trading topics.

The goal of hedging is to transfer price risk from one party to another.  Hedging has been used for hundreds of years to help producers and buyers protect themselves from price risk.  By hedging, producers and users can set the prices they will receive or pay within a roughly determinable range.  However, hedging is still an underutilized tool that many choose not to use.  This article will help you to understand the benefits of using the futures markets to reduce price risk.

Why should I hedge?

That is the question you will have to ask yourself when trying to figure out the benefits of hedging.  Would you like to protect your crops against a decline in value?  As a buyer, do you want to insulate yourself from a significant rise in prices?  The futures markets can be used to hedge the risk in both of these situations.

Cash – Futures = Basis!

This is a very important formula to remember.  Basis is the difference between the cash price and the futures price of a commodity.  Basis consists of carrying charges and costs of transportation for the commodity to an exchange approved delivery point.  For example, if the cash corn market is at $6.93 and the futures price is $7.00, the basis would be -.07 (6.93-7.00).  As the delivery month draws near and the prices converge, basis approaches zero.

Long Hedges vs.  Short Hedges

There are two types of hedges, long hedges and short hedges.  Someone who is buying the commodity later in the cash market would be a long hedger.  Someone who is selling the commodity later in the cash market would be a short hedger.  A long hedger is someone who wants to protect themselves from price increases (user).  A short hedger is someone who wants to protect themselves against declining prices (producer).  A long hedge is also known as being “short the basis” and a short hedge is known as being “long the basis.” A hedger who is short the basis (long hedger) benefits from the basis becoming more negative.  A hedger who is long the basis (short hedger) benefits from the basis becoming more positive.  In the corn example above, a long hedger would want the basis to get more negative.  A short hedger would want the basis to get more positive.

To sum it up, a long hedger wants to protect against increasing prices and benefits when basis weakens.  A short hedger wants to protect against decreasing prices and benefits when basis strengthens.

Real-World Example

A farmer who has been on the fence about hedging decides to hedge his corn crop.  He thinks that prices will remain around the current level or decrease in late August when he anticipates selling his new crop.  The cash price for new crop corn is $5.52 and the September futures price is $6.28.  The farmer anticipates that he will have 10,000 bushels of corn to sell.  Since the farmer wants to protect himself against a decrease in prices, he will be a short hedger.  His goal is to lock in the price of $5.52/bu for corn.  Each corn futures contract contains 5,000 bushels.  The farmer sells two September 2011 corn futures contracts at $6.28 on 2/23/11.

It is now September and the farmer’s instincts held true.  Cash corn prices are currently at $5.00 and September futures are trading at $5.25.  The farmer sells his grain in the cash market and offsets his position in the futures market on 8/28/11.

Change in Basis

Date Cash Futures Basis
02/28/2011 5.52 6.28 -.76
08/28/2011 5.00 5.25 -.25
= -.52 = +1.03 = .51

The farmer lost -.52 on the cash side, but his short futures position had a gain of 1.03.  The net result of the hedge is a gain of 51 cents per bushel.

0.51/bu (Gain in dollars/bu)
X 5000 bu/contract
$ 2550/contract
X 2 contracts
$5,100 gain in dollars

The net price received for the corn is calculated by adding the change in futures to the cash price at which the grain was sold.

Cash Price Received:    $5.00/bu
Gain on Futures:    +1.03/bu
   $6.03/bu

-OR-

Target Price:    $5.52/bu
Adjusted by net result:    +0.51/bu
   $6.03/bu

The farmer had a goal of getting $5.52/bu of corn when he placed the hedge.  The result of basis strengthening allowed him to actually achieve a price of $6.03/bu.

Add Hedging To Your Plan

Hedging is a great risk management tool.  Yes, the corn prices in the example could have increased and the farmer would have lost money in futures and gained money on cash grain.  If that was the case, a user could have benefited by placing a long hedge!  Remember, the goal of hedging is to transfer price risk and set the prices one will receive or pay within a roughly determinable range.  Reducing exposure to market surprises allows producers and users to plan their operations more confidently.

Receive a Free Trial Subsciption to the “Daniels Ag Advisory” Newsletter

If you enjoyed this article, please sign up for a free subscription to “Daniels Ag Advisory” newsletter.  This exclusive grain market trading resource is reviewed daily by both individual and professional agricultural commodity traders alike.  Published by renowned grain trader, Andy Daniels, the Daniels Ag Advisory newsletter provides you with real-time advice from an expert with well over 25 years of day-to-day trading experience!

Filed Under: Hedging, Risk, Strategies Tagged With: , , , , , ,