Using Expectancy as a Technical Analysis Tool

Commodities trading tools are absolutely necessary to employ and achieve profitable results in this type of market. Fundamental analysis considers weather predictions, crop yields, new mines or production areas and new technology pertinent to a specific commodity – basically, any factor affecting the supply or demand in commodities trading.

Technical analysis actually employs complex mathematical calculations to determine trends via charting identifiers such as price, volume and daily activity. Recent market activity is given the most weight in this type of analysis, resulting in a more applicable set of information to today’s market.

Of course, in the world of commodity trading any type of prediction is only certain to a limited degree. We can calculate probabilities, but not without unknown variables and the sometimes improbable result. Expectancy is one variable used in technical analysis that is both simple to calculate and utilize in your daily trading activities.

The formula for expectancy is that: Expectancy = (probability of win x average win) – (probability of loss x average loss). If you profited in 20% of your trades last year and averaged a 10% profit in these commodity trades, your losses averaged 3% and you invested $10,000, then your average profit is 0.10 x 10k = $1k, and your average loss is 0.03 x 10 k = $300. Therefore, your expectancy = (0.2 x 1k) – (0.8 x $300) = $200 – $240 = $-40. This perhaps wasn’t the best result an investor could hope for, but the calculation will help to measure the effectiveness and result of any newly employed tools or strategies in the future.

The calculation of expectancy shows that the number of times an investor is profitable is not what really matters in long-term investing. You only need to profit once in order to see a net profit, and this is the number you want to see gradually improve over time.

Even if you use a commodity broker, you can track his progress using this method. After all, it is your money he’s playing with, so you might as well keep an eye on its progress.

When comparing investment strategies between stocks & commodities, there are several differences to consider. Stocks are generally bought and held as a long-term investment to reap the benefits of a growing company that is increasing in value.

Commodities trading, however, typically involves holding on a short-term basis, and can lend to better results for even the most novice of traders. Day traders in the stock market are typically looked down upon, but this practice is expected in the commodities market.

Don’t forget to utilize all of the tools and analyses available when making your predictions about the future prices of commodities. Buying and selling futures contracts can be very exciting and profitable, but can also become a detriment if you don’t do your homework first. Ask your commodity broker or search for online commodity trading tools to help you in your quest for more information and education about investing in commodities.

Using Different Types of Orders to Manage Risk in the Commodities Market

Any type of investment does not guarantee profits or gains, no matter how informed and speculative you are. Some trades may be devastating losses, and others may call for a celebration. Overall, the advantage of employing certain types of orders will help to manage your risk level and maintain any gains you do experience in the commodities market.

Market, limit, stop and other variations are the most common types of orders used when trading commodities. Market orders are placed with your commodity broker, and he or she attempts to fill your order at the current market price. Sometimes it is executed immediately, and sometimes the price may change somewhat before the order is carried out. This speed is all dependant upon the liquidity of the commodity; it may be completed in minutes or take an entire day.

Variations of market orders also exist, including Market on Close (MOC), Market on Opening (MOO), and Market if Touched (MIT). MOO executes the order during opening of the market, and just the opposite happens with an MOC. MIT orders are much like another type of order, called a limit order. However, these are filled if and when the specified price is reached, and continued to do so even after it moves away from this amount.

Limit orders ask your commodity broker to commence a buy or sell action on your behalf at a pre-determined price level. Buy orders are usually placed below the current market price, and sell orders placed above it. These orders may or may not be filled, depending upon what the market does. When your specified price is reached, thousands of other commodity trades may need to be executed first, thus possibly eliminating the ability to fill your limit order as well.

Stop orders, also called ‘stop loss’ orders, are used to hedge investment dollars and reduce the risk of incurring significant losses. You may request a buy stop order above the current market price, or a sell stop order below it. If the order price is met, it is automatically converted to a market order and executed as stated above.

Some variations of stop orders exist as well. These include stop limit, stop close and one cancels the other. With stop limit orders, you specify two different price points to your commodity broker. If your selected commodity reaches one price as a stop order, the other, or limit price, is cancelled out.

Stop close orders are typically entered near the end of a day’s trading period. These are employed to prevent being exposed to volatile fluctuations during the day, and allow the order to be carried out if the stop price is reached during this ‘closing’ time.

One cancels the other orders combine two different orders into one in order to manage risk and benefit in different scenarios. Once one of these orders is filled, the other is cancelled, or vice versa. This type of order is especially beneficial to prevent major losses and in markets where speculation and direction of the market is unclear.

Trading Coffee in the Commodities Market

Coffee is one of the most popular consumer items available for trade on the commodities market, and is ideal for investors who prefer to financially back a product they understand and consume themselves.

Over the past few years, coffee prices have steadily risen after suffering a plunge due to natural disasters causing reduced production. Producers are still trying to recover, but investors have regained their confidence in this commodity.

During the first six months of 2006, prices for coffee fell from $1.29 to $1.13. However, this doesn’t mean that everyone lost money during the time. The beauty of trading commodities is that you can still profit when prices are falling. Unlike stocks, most of the money made in commodity trading occurs with falling price points.

Brazil is the largest producer of coffee. In 2006, the country produced 36.1 million bags, or 32% of the world’s coffee supplies. Vietnam produced 11% of the supply, and Columbia provided only 10% of the world’s supply.

Vietnam has increased its coffee production in recent years, especially since the U.S. rejoined the International Coffee Organization (ICO). The USDA estimates that Brazilian coffee production will increase substantially over the next few years.

This information, found at http://dev.ico.org/trade_statistics.asp, can help develop the proper strategy in trading coffee futures contracts.

The New York Board of Trade (NYBOT) trades these commodity futures contracts. World consumption has resulted in maintained demand of coffee, and supplies still remain low today. This means that the most basic principles of investing can be applied to purchasing these coffee contracts.

The standard contract is 37,500 pounds, or 250 bags of coffee. This means that you can obtain one for a few thousand dollars, hedging your bets against rising prices in the future.

Lowered supply and increased demand causes many investors to believe prices will continue to rise in the next couple of years. Going long and purchasing contracts with future expiration dates may prove to be quite profitable for even the newest investors to the world of commodity trading.

Coffee is a great example of how the general consumer markets and worldwide levels of production and consumptions directly affect these futures prices. In the practice of trading commodities, historical patterns and standard trading strategies generally don’t apply. You need to do your homework, researching trends and speculating about the future state of the commodity contract prices.

Using an online commodity trading tool will not only allow you to research commodity prices and current fluctuations, but will also provide the ability to record relevant information and strategies. You should also look in to taking an online course or participate in webinars that will discuss example trades and strategies.

The most important part of any trading or investment strategy is to ensure you’re well diversified and hedging your investments against risk. This may require a combination of both stocks & commodities; you’ll need to decide how involved you want to be, or whether you can trust a commodities broker to carry out your strategy on your behalf.

Managing Your Risk by Hedging Your Investment Dollars

Trading in the commodity market is typically influenced by two factors: speculation and hedging. These two factors must generally be considered together, as one never exists without the other. Speculation tends to focus on possible profits in the future, and hedging attempts to protect these profits and reduce possible losses as a defensive move in trading commodities.

Hedging is arrived at with the realization that no investor can correctly speculate future changes in price 100% correctly. Even with the best estimates, timing is an important factor needed in order to capture these profits at the right place.

If you determine that prices are trending upward or downward correctly, you also must guess when to enter and leave the commodities market. Employing a few simple hedging strategies can improve the odds of winning and retaining profits in the long run.

Futures prices and spot markets tend to move in the same general direction. These spot markets are those where the actual physical commodity is bought or sold, and futures are simply contracts for the future delivery of the same commodity. Thus, increasing or decreasing prices in the physical market can influence the investing activities in these futures.

However, there is a difference between spot market pricing and contract pricing. This difference is called the ‘basis’, where basis = cash price – futures price.

When investing in these futures, investors may go short or go long, or mix the two different strategies at different times and between different commodities. ‘Going long’ refers to buying at a lower price, intending to sell the contract at a higher price in the future – much like common stock market investment strategies. ‘Going short’ requires selling a higher-priced contract before buying at a lower future price – much like ‘selling short’ in the stock market.

Going short means that you must borrow the contract for the commodity from your commodity broker before later selling it for profit. This hedging method is beneficial in times when the basis is increasing, and going long is best in markets that show a lowered basis level. It’s important to note that a commodity’s basis may increase or decrease without regard to the direction of actual price; it’s the difference between the two that actually matters.

Using this simple basis calculation can give you an idea of what direction the commodities market may be heading, though it’s never a sure thing. This should simply be used as a tool along with other online commodity trading tools to help you make beneficial trades.

Sometimes, a combination of hedged and unhedged trading is required for a specific commodity. You may want to go both long and short on a basis that is largely unchanged over a specified period of time, purchasing different futures contracts for that commodity.

Novice investors should always seek the help of a commodity broker when entering the commodity trading world, at least at first. As time goes on, you’ll discover the best strategies for making the best bets on these contracts, increasing your net profitability over time.

Including Commodities in Your Investment Portfolio

The S&P 500 index displayed a general upward trend from 1974 to 2004, but during this same time period the Commodity Research Bureau (CRB) showed the opposite trend. CRB trends are much like the Dow Jones Index, using complicated mathematical calculations and combinations of commodities price points to indicate a general direction of movement.

Weighted averages are used when considering the price of oil, orange juice, gold and wheat, and many investors continue to profit when including both stocks & commodities in their portfolio.

How are profits realized in commodities trading when the general trend is downward? Well, these indices don’t include detailed daily price movements that active investors and commodity brokers take advantage of. Differences between daily highs and lows still have the ability to create profits no matter what the general trend of the commodity may be.

A general understanding that stocks & commodities prices usually move in opposite directions allows the educated investor to use this knowledge to his advantage. Historical trading strategies typically account for these trends as well as differences in individual commodity trading results.

Some investors believe that going against the general public’s actions in the market allow for alternative and positive results. This strategy is true for various investment types, including stocks &commodities, and within separate categories of them.

All successful investors understand the importance of a well-rounded and diversified portfolio for long-term growth and hedging against risk. Stocks, cash, bonds and sometimes commodities, considered a short-term investment, can be part of this overall trading strategy. Inflation will affect different types of investments in different ways as well. In certain economic climates, prices may increase; in others, they will fall.

Specific types of commodities are also known to historically rise, such as oil. Several years ago, it was trading at a fraction of today’s price. Precious metals such as gold have exhibited price patterns subject to your personal opinion. Prices for gold were at a high thirty years ago, but dropped and held steady until 2003, when it rose 40% once again.

Several investors claim the price of gold will continue to rise in the near future, and are hedging their bets that this is true. This is why the commodities market trading is so volatile, though – individual speculation can lead to great gains or detrimental losses.

Other investors prefer to maintain the investment strategy of sticking with what works, and consumers will continue to buy such commodities as coffee, sugar and oil. However, over time the increased demand may also lead to lower supplies and exponentially higher commodities prices.

Hot commodities such as gold and oil may provide some very profitable sessions in the coming years with increased liquidation and lowered reserves available. Maintained or increased demand of these products by consumers will consistently drive the prices of them upward.

If you’re considering adding some of these hot commodities to your portfolio, consult a commodity broker to discuss the appropriate investment strategy for your personality and goals.

« Previous Page