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Commodity Supply and Demand

Fundamental analysis in commodity trading has to do with anticipating commodity supply and demand. Successful traders who sell commodity futures and those who buy commodity futures learn and follow the various aspects of commodity production. Gold futures are affected by the fact that gold mining companies are digging deeper for gold in developed countries and exploring in politically unstable regions of the world. Corn futures are affected by drought, flooding, and the worldwide acreage planted. Oil futures are affected by disasters such as the BP oil spill in the Gulf of Mexico. Commodity supply and demand is the basis of commodity price. Anticipated commodity supply and demand is the basis of commodity futures price. Commodity demand rises for industrial metals like copper and energy commodities such as natural gas during an economic recovery. Thus commodity supply and demand together determine commodity price. To understand how commodity supply and demand, as well as market factors, determine commodity prices a new trader ought to consider Commodity and Futures Training. For the more advanced trader in commodity options a course such as Options Training with Stephen Bigelow can be very useful.

Traders in commodities buy futures and sell futures. Buying puts, buying calls, selling puts, and selling calls on commodity futures is also done and can be profitable as well. Trading supply and demand has to do with fundamentals of the individual stocks, options markets, commodities, and futures of the equity market that one is trading. Technical trading has to do with anticipating the actions of others in the market. Unlike trading other equities basic supply in the case of commodities really has to do with just how much of the commodity there is for sale, not how much stock, for example, is available at a given price. Demand for agricultural commodities has to do with how many hungry people there are and how much they can pay for rice, wheat corn, milk, eggs, and meat. Demand for energy commodities goes with a thriving economy as well as severe northern winters. It drops during a recession and when a northern hemisphere January is mild.

Successful options trading in commodity futures is just as strongly related to commodity supply and demand as is buying and selling commodity futures. Buying options gives the buyer the option but not the obligation to purchase or sell if commodity futures price movement is beneficial. Selling options on commodity futures entails the same set of risks as buying and selling stock options. It tends to be more profitable over the long run but can result in occasional substantial losses. In commodity options, just like stock options, it is the large investment houses and companies with deep pockets who typically engage in options trading of commodity futures. All trading in futures and options may ultimately depend upon supply and demand. However, the business of buying and selling at the optimal price is most commonly and most efficiently assisted by use of technical analysis tools such as Candlestick analysis. In the end everyone knows the fundamentals and it is the ability to predict the sum total of what other traders will do that leads to profits.



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Good Investing,

The Candlestick Forum Team


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