%K = (Recent Close-Lowest Low (n) / Highest High (n) Lowest Low (n)) x 100

%D = 3 period moving average of %K

And (n) = the number of periods used for calculations

Hence, a 20 day stochastic oscillator would take the most recent close, the highest high of the last 20 days as well as the lowest low of the last 20 days. The general time period used is the 14 time period. These formulas are shown here for clarification only. One rarely ever needs to calculate these values manually, as the software used for charting will automatically plot it straight on your commodities chart.

Stochastic Oscillator – How Do We Use It?

Basically, Stochastic Oscillators have three types. Fast, full and slow. By default, most software for trading tends to use the fast one. Here, the oscillator comprises of two lines. The first one is %K which measures the raw momentum of the commodity. As discussed earlier, %D is just a simple moving average of %K, but is still more important than %K. Generally, it is seen that the %K line is the faster line, and the %D line is the slower one. A trader needs to look out for %D line and price both moving to either overbought territory, or the oversold territory. One can sell a commodity when it moves above 80, and then crosses over to begin moving down again and buy when it reaches 20 and begins to move up again. The slow or full stochastic oscillators are smoother, as compared to the fast stochastic. However, it is important to remember that just because the oscillator shows that it is above 80, this does not mean that it is overbought. It may well continue to trend upwards a long time after that.

Divergences

Sometimes, something unusual happens. There is sometimes a divergence between the prices and the stochastic oscillator. When prices are moving up the oscillator is showing that it is oversold, and vice versa. This tells us that the current trend is losing steam. So, if the commodity moves up, but the %D is going down, this would be a bearish sign. However, it must be noted that the signal is not considered a divergence till %K line moves across the %D line in a direction opposite to the price. One has to be careful with the stochastic oscillator as there are a lot of whipsaw possibilities. Divergence trades are best taken when the oscillator moves below 80 once, moves back up again, and gives a double top formation to move down again below 80.

It is not advised to use this oscillator by itself for commodity and commodity options trading. It is always better to get verification from as many different indicators, but this indicator will give you a very good idea about the trend momentum of a commodity.

How To Use Charts

A good trader will always use professional charting software that give him the right tools, and are comprehensive in nature. Good software will give the discerning trader the variety of tools he may requires for his daily trades. Some of the different types of charts that can be viewed by such software are candlesticks, bar charts, and open-high-low-close charts. Traders can (and often do) view these charts in many different time frames starting from as low as one minute to monthly and yearly as well.

In fact, most traders work with at least two or more timeframes when they are trading to get confirmation of a trade in more than one time frame at a time. They put in the indicators they want to use and check the filter to see what commodities result as trade possibilities. The biggest additional benefit of having charting software is to be able to incorporate your own custom indicators and oscillators that you can use in different time frames. Some softwares even allow you to build your own indicators by programming them into the software yourself. This flexibility is what makes having software for charting so useful and worthwhile.

Advantages Of Using Them

For commodity future traders and futures options traders, charts are exceptionally useful in determining the trades that they will take. Having technical filters help you short-list the commodities which are currently showing a buy or a sell. You can tell much more easily whether a commodity is trending or not. Simple tools such as it moving above a moving average with very large volume expansion can give you the signal you are looking for to buy into a commodity. It also helps you determine what commodities are concluding their trends so you can sell them if you have any lots. The data itself is easily available and many vendors add it at little or no cost as a package deal when you decide to open a broking or trading account with them.

Essentially, charts tell you when a commodity is trending for you to enter into a commodity trade or commodity option trade, give you stop levels, help you decide on a target for your trade, and give you an indication when the trend may be ending. Now, if these are not things worth having, then what are? Some comprehensive and popular software includes names like Metastock, Tradestation, and Advanced Get.

A visual aid is always easier to understand, and offers you the scope of being much more detailed in your study of any commodity. That is why charts are now the industry standard, and will make things much more easy for you if you too use them. At the end, you have to remember that these tools can only help you indicate a buy or a sell, but it is you who has to take the call and decide what you want to do.

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Moving Averages: How Do We Use them?

Moving averages identify trends and trend reversals, give a measure of a commodities strength, and help you arrive at support and resistance levels. Essentially, moving averages are indicators with lag, which is to say that they do not identify new trends but are useful in trend following. One of the most useful ways in which you can use moving averages as buy or sell indicators, is to have three moving averages running at the same time on the same chart. The idea is to have one short, one intermediate and one longer term time frame. When the first two move upwards and cross above the longer term one, it indicates an uptrend and one can buy. The reverse happens if the first two move below the third moving average. In that case, you can sell, as the commodity is in a downtrend. A good example of this would be a 10, 20, and a 30 day period moving average, plotted on a commodity chart.

Moving averages are also used by traders to determine support and resistance of a commodity. When the commodity reaches a moving average and struggles to move above it, you might have found resistance. If a commodity stops falling at a key moving average, it can be deemed to have found support. A prime example of this is a 200 day moving average, which is used to calculate long-term trend directions, and to find support and resistance in them.

Types of Moving Averages

There are different types of moving averages. The simplest one is the simple moving average (SMA), which is calculated by taking the normal arithmetic mean of a specified set of numbers. The exponential moving average (EMA) is calculated by giving weightage to more recent data. The EMA is regarded to be a better moving average compared to the SMA. Both of these moving average variants become very useful when used for trend following with moving average crossovers. Indicators such as the moving average convergence divergence (MACD) and Bollinger bands use moving averages as key components. The MACD shows the price divergence of two moving averages, by subtracting a 26 period EMA from the 12 period EMA. A third 9 period EMA is used to show us buy and sell signals when it moves above or below this MACD. Bollinger bands, so named after their creator, use two standard deviations plotted away from a 21 period SMA.

Whichever way you look at it, one cannot deny that using moving averages by themselves may not make you a millionaire in a hurry, but are brilliantly useful in helping you follow trends and plan your commodity trading and commodity options strategy.

Futures commodity trading, as we know it today, came about for the first time in Japan in the 17th century, where rice was traded in future contracts. It was a period when farmers and buyers came together and decided to commit to each other future prices negotiated on suitable terms in exchange of grain for money. For example, a dealer would agree to buy a ton of rice at the end of the next month for a certain price from a farmer. This would be ideal for both parties, as the farmer would know how much he would get for his rice in advance, and the buyer could plan to raise the money he needed for the purchase. Contracts such as these became more and more popular and common, and were even used as collateral for taking loans. If the buyer could not take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer could not deliver the goods, then he could hand over the contract to another farmer. Thus began commodity futures trading, as we know it today.

What Are Commodity Futures?

Today, most of the futures commodity trading exchange are set up in a similar way. Members of the exchange do the actual trading on the floor. Stock stands for equity in a public company, and can be held as long as you want whereas commodity futures trading contracts have a specified life. In the past, generally people used commodity futures trading methods to hedge risks and fluctuation in prices, or to take advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of a commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to buy the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. It is to be noted, however that, the delivery generally doesn’t take place. The contract is usually liquidated before its expiry. The entire trade is based on the idea that there will be no delivery, but we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading and futures options trading is done all over the world now.

Different Types Of Commodities

There are many types of commodities that are traded in the international market.These can be broadly categorized into the following:

Precious metals like Gold, Platinum, Silver, etc.,
Metals such as Aluminum, Copper, Steel, etc.,
Agricultural products like Rice, Corn, Oils, Cotton, Wheat, etc.,
Soft commodities such as Cocoa, Coffee, Tea, Sugar, etc.,
Livestock like potbellies, cattle, etc.,
Energy commodities like Crude oil, Gasoline, Gas, etc.

If we include forex markets, it has been noted that volumes for futures
trading is far more (or many times over) than those of equity markets in
the US. This goes to show us the amount of interest that futures trading generates worldwide.

Momentum Day Trading

A good momentum trader would wake up early in the morning reading up on the news that may have affected existing trades, or new ones generated the previous day by his system. Momentum traders use online trading platforms more often as it gives them the power of speedy trading. These platforms also provide the latest market news and picks for the trading period. Commodities that have shown very large volume growth with an increase in momentum recently are ideal candidates for the next few trades. Business channels often blare out the latest commodity market updates live and traders gather as much information as they can to help them determine which trades they are going to take.

Momentum traders use charts regularly to determine trends and momentum picks.

Momentum Trading With Charts

A good momentum trader picks trades by using key indicators which usually includes the momentum indicator. This indicator analyzes actual total changes in a commodities closing price over a predefined amount of time while comparing its traded volumes. These are what will tell the trader whether he can shortlist the commodity or not. Once the trader has picked out the trades that match his criteria of being in momentum, the chart for the commodity is pulled up and analyzed. Here, re-confirmation of a trend and momentum are established in different timeframes for the same commodity. When a breakout is confirmed either up or down, then the order to buy or sell the commodity futures is placed. As soon as this order is executed, the disciplined momentum trader immediately places a stop order limiting his loss to a certain fixed amount, which is determined by his trading system.

If he is correct, the commodity will move in momentum, and breakout of its range. If it does so, and the trader keeps investing the money on this particular trade, he will maintain a keen eye on his technical indicators and oscillators for any exhaustion signals. When he gets an exhaustion signal, or when his target is reached, he will place an order to close the trade. While his trade moves in momentum, he will also move his stop up slowly to make sure he locks in some gains every time the trade responds in his favor. This is called a trailing stop. Of course, he will be stopped out if he is wrong.

Thus, a momentum trader essentially uses momentum indicators to trade possible breakouts in futures or futures options, which are showing momentum according to the trading system on the charts. However, to be a good momentum trader, discipline and hard work is necessary.

The Basics

When you trade in commodity futures, you dont actually buy something. Instead you buy its future contract purely on the assumption that the price of the commodity is likely to move upward in the immediate future before the expiry of the contract. You buy to gain profit from this increase in price. For example, if you buy gold futures at $650 now, and the price at the expiry of the contract is $660, you would have made $10 on the commodity futures contract without actually trading in or buying any gold.

People choose to trade in commodity futures and futures options because it offers them an opportunity to get very large leverage on their invested capital. If, for example, you had about $20,000 you would be able to buy an S & P 500 stock future of the index. The same in actual equity stock could cost you $350,000. So, you get leverage of 17 times on your $20,000 if you invest in futures. This has huge ramifications where return on investment is concerned. If you make $20,000 dollars on an upward trend on this contract, you would have ended up with a 100% profit on your investment! This is as opposed to investing in actual stock worth $350,000 and getting $20,000 as return on investment. Puts things in perspective, doesnt it?

What Are The Risks Involved?

However its not all roses out there or everyone would be trading and doing nothing else. The truth is that there are many inherent risks in doing commodity futures trading too. The key is the risk to reward ratio. A lot of people are not as concerned about the return on their money as they are of their invested money returning. Greater the risk, the greater is the return. If youre wrong, you lose just a few thousand dollars trading carefully over a long period of time, but if you dont have the luxury of patience, you may lose a fortune quickly in just a few large trades.

Hence, one must remember that there is a huge risk of loss in commodity futures trading. To limit this loss, people use what is known as a stop or a stoploss. These are orders placed to square off your position if it turns against you in any trade to limit your loss. These are considered an essential part of futures trading, as you never know what unforeseen event lurks ahead that has the potential to wipe out a large chunk of your invested capital. To make money, one has to accept that you will lose money also. If you have a good trading system, and use stops in your trades, you are sure to succeed over time.

Sometimes markets move so fast that your stop loss will not be hit. This is due to the broker not being able to trade the market for you because of these limit moves. It is for this reason, many only choose futures options.

Commodity futures hold immense potential in making for you huge amounts of money. However, one needs to be careful, and invest funds wisely and with patience.

These types of transactions are never offered on the usual stock market but you would find them on what is commonly known as the futures exchange. They are not considered to be securities in the strictest sense of the word as stocks or bonds may be. They are a type of derivative.A futures options contract or a commodity option is a derivative as well.

The actual prices associated with the various commodities vary according to the supply and demand. If the pork belly crop is bad this year the prices will likely be high while an over abundance of coco would result in a lower than normal price. The future date is known as the delivery date while the daily bid on the exchange would be the settlement price.

In a nutshell in futures trading, what a contract states is that the holder can take delivery of the commodity at some future date however the futures must be complied with by the settlement date. At the settlement date the seller will deliver the asset to the buyer whether it is coco or pork bellies or whatever. In order to fulfill your obligation prior to the established settlement date you must offset your position by selling if you purchased the futures or buying back if you had a previous short position which ultimately allows you to balance everything out.

An interesting side note here is that if you purchased a futures contract and do nothing and the settlement date arrives you could end up with a yard full of assets that you really did not want. Unlike stocks and bonds we are talking real time products here.

Though futures options are quite risky investments that can only be understood by expert traders options can be very useful to the individual investor as well.

Futures Options can also add value to your portfolio and have several other advantages that are definitely worth noting. A few are outlined below and will help illustrate reasons why options have gained so much popularity in such a relatively short period of time.

The first advantage of options on futures is that they can provide increased cost efficiency. Since they possess great leveraging power, you the investor can obtain a great option position that nearly mimic a futures position but save you unnecessary cost.

The second advantage is that they provide less risk when used correctly. While there are situations where buying options is actually riskier than owning the futures, but they can also be used to reduce the amount of risk incurred. Futures options can be less risky because they require less financial commitment than equities. They are also the most dependable form of hedge which makes them safer than stocks.

The third advantage of futures options is they provide higher potential for returns. This means you can spend a lot less and make nearly the same profit as you would with the underlying futures. This gives you a higher percentage return.

The fourth and final advantage discussed in this article pertains to the strategic alternatives futures options can provide. Options are a very flexible tool and provide many ways to recreate other positions. These positions are known as synthetics. Synthetic positions provide you the investor multiple methods of attaining the same investment goals which can prove extremely useful.

The four points outlined above are the key advantages futures options offer and are a contributing factor to their growing popularity. If used correctly, they can present less risk than straight futures and can actually save you unnecessary costs while providing you the same profit. This is important to consider when selecting a type of investment. You want to get the most out of your money and futures options provide several ways of making this happen. Take the time to review this information before ever making a buying decision. Make sure you understand how you may benefit from the decision you make and what it will mean for you in monetary terms.

Before you decide on a particular investment, consider the key advantages and weigh the risks of each possibility against what you are willing to lose. Be sure you understand how to correctly utilize futures options in order to get the most out of them. You are investing for your future so think wisely and choose carefully. The more you know, the closer youll be to a more secure and prosperous future.

Technical Analysis Defined

The process of determining the condition of a commodity (based on the historic price) with the help of charting is called Technical Analysis. It combines probability mathematics and statistical information to determine the future price movement of a commodity with probability on your side. For example, if someone were to walk up to a door, and you were told to guess which direction they would go left or right, whatever you chose, it would be speculation. On the other hand, if they went left, and you followed them, that would be called trend following. Similarly, if a commodity future moves in a direction and you use TA to guide you, you can buy it after it shows a move into a certain direction, and a trend has been confirmed.

Uses Of Technical Analysis

There are many ways TA helps traders in trading futures options and commodities. The primary principle in TA is to have the ability to follow trends. To be able to do this, one has to be able to catch it early enough. So, you can buy into a commodity if you can confirm that it is in an uptrend. The key point to remember is that TA assumes that price discounts everything.

All movements of market participants are reflected in the price of any commodity at any given point in time. The idea is to buy low and sell high, or vice versa. This sounds simple in theory, but is difficult enough in real life. Imagine knowing that the probability of a commodity will breakout on the upside, but also that it is only a probability, and not a surety.

How Do We Use Technical Analysis?

TA has many different theories. These include common theories and indicators such as moving averages, Fibonacci series, oscillators, Gann Trading theory, Elliot wave theory, and the age-old Candlestick theory from Japan. Many users tend to combine one or more of these theories to get better accuracy in determining the trend more correctly in their favor. One has to remember that probability must to be on our side.

The risk to reward ratio should always be in our favor. A lot of people use TA to help them establish a trend, get the point of a breakout and look for a point to buy or sell a commodity. They also use it to determine their stop-loss, and possible target price. This is an advantage that TA has over any other form of analysis. Being mathematical in nature, it gives you exact figures as to what levels you need to enter and exit a commodity.

Technical Analysis is a powerful tool that needs to be executed with care and discipline. It provides the right foundation you need to determine the price trend of a commodity with more accuracy.

A futures contract is an agreement to buy or sell a specific quantity of a commodity at a certain price in the future. Such contracts are available with commodities such as crude oil, gold and natural gas. They may also be bought for agricultural products such as cattle or corn.

Many who participate in the futures markets are commercial or institutional users of the commodities they actually trade. They may then use these markets to take a position that reduces the risk of financial loss when a price change occurs. Individuals who choose to participate are speculators hoping to profit from the price of the futures contract. They usually choose to close out their positions before the contract is due, thus not accepting actual delivery of the particular commodity.

If you decide to invest in a futures contract or future option you will need to open a brokerage account if your broker does not trade futures. You will also be required to fill out a form that acknowledges your understanding of the risks associated with this type of trading. The contract for each commodity requires a minimum deposit that will vary with each specific product. This deposit amount depends on the broker and the value of your account will either increase or decrease with the contract value. If the contract value decreases, you will be subject to a margin call and will then need to place more money in your account in order to keep the position open. Because of the huge amounts of leverage, you can receive huge returns or suffer large losses just from small movements in price. This means a futures account can literally double or be wiped out in only minutes.

Most futures contracts also have options that are associated with them. These futures options still let you invest in the futures contract by, but limit any loss you may incur to the options cost. Since options are derivatives, they usually do not move point-for-point with the futures contract.

There are, however, advantages to buying futures contracts. One is that the leverage they provide allows for large profits for those who are on the right side of the trade. Another is minimum-deposit accounts control full size contracts an individual investor ordinarily would not be able to afford.

Before investing in a futures contract make sure you understand the risk involved. Know, too, that there are significant advantages like the ones mentioned above that can make these contracts very profitable for you.