Futures Contracts - Profitable Investment Alternatives?
With the growing popularity of futures trading, more and more people are jumping into this interesting form of investing. People quickly find out that futures contracts are vastly different than agreements to purchase common stocks; with futures contracts, you are not actually buying a particular commodity, you are obtaining the right to purchase the underlying asset during a particular time period.
Pork Bellies?
Another difference between investing in the stock market and investing in futures contracts is the asset itself. Of course stocks are the assets involved in the stock market, while the commodity assets in futures contracts include:
- Currencies The currency market is one of the best known commodities, trading the likes of the British pound and the American dollar.
- Interest Rate Futures T-Bonds represent long-term interest rates and Eurodollars are for short-term interest rates.
- Energy Futures Natural gas, heating oil and crude oil futures are the most widely known in this sector.
- Food Sector Coffee, orange juice and sugar are well known commodities in this sector.
- Metals Gold, silver and copper are traditionally strong commodities.
- Agricultural Wheat, coffee, cotton, soybeans, pork bellies and corn futures are among those that are best known.
With so many futures contracts available, it can be difficult to decide which commodities interest you, especially if you are new to commodities trading. Sometimes it can be helpful when you start trading to begin with more popular commodities.
Below are five of the most popularly traded futures contracts:
- S&P 500 E-mini This is extremely popular for those investing in the futures markets. The E-mini can be traded electronically 24 hours a day, five days a week. In addition, the E-mini has most of the same advantages of the regular S&P 500 commodity but the cost of investment is much less.
- E-mini NASDAQ 100 The E-mini NASDAQ 100 follows the movement of the NASDAQ 100. Like the S&P 500 E-mini, this futures contract can be electronically traded and the contract and the amount of margin you have to set aside to trade the contract are smaller than a standard contract. Since most individuals don't have large enough accounts to trade regular contracts for the NASDAQ 100, the E-mini works out great.
- Light Sweet Crude Oil Probably the most famous commodity traded is oil futures. When you see the price of oil discussed on the evening news or in an investment newsletter, this is exactly what they are discussing.
- Gold If oil isnt the most famous futures contract, then gold surely is. A gold contract tracks the price variations of one ounce of gold. Gold became an important part of the US economy when the United States went to the Gold Standard in the 1970s. Since then, the price of gold changes dramatically, almost always in the opposite direction of the US dollar. Gold investments are frequently used as hedge funds because of the relationship with the US dollar.
- E-mini Euro FX - The E-mini Euro FX contract tracks the movement of the exchange rate between the U.S. dollar and the Euro. The "E-mini" means that the contract and the amount of margin you have to set aside to trade these futures contracts are smaller than regular contracts. Most individuals don't have large enough accounts to trade a regular contract for the Euro, so E-minis are excellent investment strategies.
Conclusion
Futures contracts provide interesting and potentially profitable investment alternatives to many investors. Understanding the investment basics of futures contracts and commodities such as these will help you to be a more successful trader when it comes to futures contracts.
Market Direction: The trend is your friend! A trend is merely the continuation of the current investor sentiment. Although that may be an oversimplified statement, the analysis does not need to be anymore involved than that. What creates a trend? Investors being in a bullish mode, a bearish mode, or an indecisive/choppy mode. The power of a trend is the fact that investment sentiment are not changing from the current outlooks. Candlestick analysis simplifies the evaluation of a trend. Candlestick formations are the composite of investor sentiment.
It is not unusual to hear the so-called experts profess that the market is over bought or oversold. Those statements are merely the historic perspective of the person making the statement. The market is the accumulative outlook of everybody that is buying or selling. There have been many opinions expressed that this market is overbought ever since September of last year. That opinion may have cost investors large percentage gains if they invested tentatively based upon that outlook. Let the market tell you what the market is going to do! The candlestick signals reveal what is going on in investors' minds now.
As expressed in our newsletter approximate 10 weeks ago, after a one-day severe pullback that had everybody projecting at least a 10% correction, the signals were not confirming that prognosis. As anticipated, the new uptrend, after the profit-taking pullback, has moved with a much stronger trajectory. The reason for this is very simple. The profit taking that everybody had been expecting, as the market moved up steadily for seven months, was now over. That fear was out of the way. The new buying could be done with more aggressiveness.
The Dow has had an extremely strong run up. As of yet, there is no indication that the Bulls are weakening. Utilizing the tee-line becomes a very useful guide for indicating the continuation of the uptrend. The NASDAQ has revealed some consolidation over the past week and a half but no true candlestick sell signal. This has allowed the stochastics to move back down into a moderate level. Any new buying from these levels would indicate that the short-term profit-taking was over during a strong uptrend.
DOW
A major benefit of candlestick analysis is the ability to anticipate when a strong price move might occur. Over the past few days, ENT was identified in the chat room as being a high probability strong price move. What led up to this projection? The information revealed from candlestick analysis. Over the past six weeks, the price has traded relatively flat. Especially since the beginning of May, it could be seen that there was very indecisive trading.
ENT
The big percent price move, out of that trading range, was an alert that something new was coming into the stock price. Having the knowledge that prices usually move extremely strong, one way or the other, after a relatively indecisive/flat trading sessions, allowed for an early entry into a strong price move.
Whether breaking out of an indecisive trading range or anticipating a possible reversal at a major moving average, when stochastics are in the oversold condition, helps anticipate when a reversal could occur. The confirmation, as seen in the PALM chart, is being able to recognize strong reversal signals occurring at those important levels.
PALM
Candlestick signals provide the immediate information needed to get into new trends at the most appropriate times. Learn how to use candlestick signals correctly and you will be able to dramatically improve your investment acumen.
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