Candlestick Trading Blog

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With a history of over 160 years, futures trading has a rich past as well as a bright road ahead. Although futures trading has been around for such a long time, it is currently viewed by many as the ”next new thing.” With the buzz that has been surrounding futures, a little history lesson in commodity trading might be in order.

The Origins of the Futures Markets
The origins of futures markets are found during the 1840’s, when Chicago was transformed from a sleepy town to a booming commercial center. No longer isolated from the East, Chicago now was connected by both the railroad and the telegraph. About the same time, the McCormick reaper was introduced; this machine revolutionized wheat production and lead to tremendous increases in yields at harvest time. Farmers from throughout the Midwest came to Chicago to wheat dealers; these dealers in turn shipped the wheat all over the country.

When a farmer arrived in Chicago, he was hopeful that he would receive a fair price for his crops. Unfortunately, the city had very few storage centers and no standard methods for weighing or grading the grain, creating a very unstable market. In the end, a farmer was left hoping for the best, having to rely on the dealer to be fair with his evaluation and pricing.

Creating a Fair Solution
In 1848 a central location was opened, the predecessor of futures exchanges, where dealers and farmers could meet to deal in “spot” grain; this was similar to an open market where dealers paid cash to farmers for on the spot deliveries of grain.

The next phase occurred when farmers and dealers began to agree on futures contracts; this business practice was beneficial to both the farmers and the dealers since both could know in advance exactly what the price of the wheat would be. The two parties may have exchanged a written contract detailing this agreement and may have even exchanged a small amount of money representing a "guarantee."

History in the Making
Over these contracts became common and could even be used as collateral for bank loans. Transferability was also created at this time. If a dealer held a futures option but didn’t want to take delivery, he would sell his options to someone who did want the grain; the same might occur if the farmer didn’t want to deliver at a certain price as well. Factors such as weather and harvest size had a direct impact on the cost of the grain.

No long after this form of arrangement took place, others got involved that had no intention of actually buying or selling wheat. These people were speculators who looked for the price fluctuations and bought and sold contracts, taking the investment risk in order to capitalize on these price differences. Even in these early days, the very principles of futures trading could be seen as modern-day futures trading was born and took shape.

Some Things Never Change
Just as the basis of commodities trading is unchanged from the 1840’s, the best method for tracking and analyzing the futures market has its basis in history. Japanese Candlesticks was invented during the 17th Century for use in the Japanese rice markets. The principles used have evolved into the very best solution for market analysis in today’s futures markets.

Conclusion
Part of understanding the present is understanding the past. The principles of the American futures market have their origins in the 19th Century but they continue to go strong even in the 21st Century. Such is the beauty of the history of futures.