You can take different paths to futures investing.
To invest successfully in futures contracts, you need to assess where the market is headed as accurately as possible. One resource is professional analysis, which may be either fundamental or technical. In fact, most futures traders rely on both perspectives in making their decisions
They use fundamental research to examine market conditions and technical research to support or question their price predictions.
Fundamental analysts try to determine the supply of a particular commodity and the corresponding demand. Changes in contract prices, which drive profit or loss, are largely based on whether there is a surplus, which drives prices down, or a shortage, which drives prices up.
With agricultural commodities, the analyst looks at weather forecasts, projected crop yields, likelihood of crop failures due to disease, financial factors affecting farmers’ activities, and the prices of alternative, competing commodities. For example, the lumber market is driven by housing starts. Copper mining futures are affected by labor and political unrest in countries with significant mining output.
The concerns are different with financial commodities. For example, demand for a particular currency is affected in part by US consumers buying products priced in that currency. So analysts may look at the volume of Japanese electronics or automobiles that US consumers are buying. The more these products are in demand, the higher the value of the Japanese yen tends to be against the dollar.
Technical analysts ignore supply and demand, looking instead at the futures market itself — including price behavior, trading volume, and open interest, which is the number of outstanding contracts on the commodity that have not been offset.
For example, technical analysts chart prices to detect the pattern in which they’ve been moving, to determine a trend-line, and to assess when the direction is going to change. Using sophisticated computer programs, they digest and analyze reams of data on the complex relationship linking trading volume and price trends.
US futures markets are regulated at three levels. Each exchange is an SRO, responsible for its own operations and the conduct of its member firms. The National Futures Association (NFA) is the industry SRO, responsible for oversight of the firms and individuals who trade for investors. It has the authority to discipline those who violate its rules of professional conduct.
The Commodity Futures Trading Commission (CFTC) is the federal regulator, responsible for keeping markets competitive, transparent, and financially sound and for ensuring that investors have the information they need to make informed investment decisions.
Rather than trading futures through an individual trading account, you may choose to participate in the futures market through a managed account or a commodity pool.
A managed account is your own individual futures trading account, except that you have given a registered professional account manager, sometimes called a commodity trading adviser (CTA), a written power of attorney to make all the trading decisions. You may need to commit more money to open a managed account than to trade yourself. And you’ll pay management fees in addition to the usual transaction fees.
Commodity pools combine your money with money from other pool participants to create an account that is similar in operation to a stock mutual fund, but is not a mutual fund. Because a commodity pool is usually structured as a limited partnership, you share in the gains and losses in proportion to your investment, but your risk is limited to the amount of your investment. That means you are also protected from the margin calls which can occur in this highly volatile market.
Another potential advantage of a commodity pool is the diversification it adds to your portfolio by:
- Investing in a variety of futures contracts
- Providing a return with a low correlation to the returns on most traditional investments
You should review the disclosure documents that the commodity pool operator gives you to determine the fees involved and the trading philosophy and practice. For newly formed pools, you need to find out whether active trading has begun or is contingent upon raising a minimum amount of pool money. In the latter case, you’ll want to know what is being done with your money in the interim until the pool begins trading.
Both CTAs and commodity pool operators must be registered with the CFTC and be members of the NFA. You can check the credentials of firms and individuals in the futures industry by using NFA’s Background Affiliation Status Information Center (BASIC) on the NFA website.
How To Invest In Futures? by Inna Rosputnia
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