Keep in mind that futures prices are more volatile than stock prices. An established company that has enjoyed a long history of solid earnings will probably continue to do so. But a commodity that has trended up during one year, may turn around in the opposite direction the next year - and very quickly, too. For this reason, the commodity trader cannot sit back and relax knowing that his futures contract will bring in smooth returns. He must do his homework. In the futures market that means forecasting using fundamental analysis, technical analysis (charting), or both.
Information Sources for Fundamental Analysis
The fundamental approach to forecasting futures prices involves monitoring demand and supply. Traders gather this information from a number of sources trade organizations, private newsgathering and research firms, and the press. The most complete source of information is the U.S. government through the Departments of Agriculture, Treasury and Commerce and the Federal Reserve Banks.
Several brokerage firms issue market letters, which are usually in the form of digests of market information with opinions on future price trends.
Also, a few private advisory services provide commodity market information. They analyze available information from government and other sources, and make their own market and price forecasts.
Technical Analysis - the Philosophy of Charting
The cornerstone of technical trading is the belief that fundamental information, political events, natural disasters and psychological factors will quickly show up in some form of price movement. The chartist, therefore, searches for certain formations or patterns which indicate bullish or bearish shifts in fundamentals. If his analysis is correct, he can quickly profit from the changes without necessarily knowing the specific reasons for them.
Fundamental traders can also use charting information. Since the market price itself may react before the fundamental information comes to light, chart action can alert the fundamental analyst that something is happening and encourage closer market analysis.
How Charting Works
Bar charts, one of the more popular tools of traders, include information on a particular futures market's price movements, volume and open interest. Such charts are produced daily, weekly and monthly. Studying historical patterns can help to provide a long-term perspective on the market.
In addition to studying chart patterns, traders also look at moving averages, oscillators and other devices in ascertaining how bullish or bearish a market may be growing. Computer models are also used to check trend direction.
Charting is not an exact science. Allowances must be made for errors, and unexpected events can disrupt forecasts made on chart patterns. Even so, many market participants - both fundamental and technical traders - find that charting helps them stay on the right side of the market as well as pin down entry and exit points.