Chapter Six
Futures Price and Market Analysis
Hedgers and speculators operate in the same markets and utilize the same analytical and risk management tools. But as they are in the market for different reasons, they place a different emphasis on one set of tools over another.
A hedger wishes to limit his risk by locking in a desired price. To do so, he will examine the current market conditions for a particular asset and relate them to historic trends. He will buy or sell a futures contract when he sees a price he likes, and he doesn’t worry much about the contract’s future price.
In contrast, a speculator buys or sells a contract when he sees a profit opportunity. He too has studied the market, but he is much more concerned than the hedger with future price movements. Having a sense of market timing is essential for a speculator. He must also be aware of the strength of the market and the current state of his own trading portfolio.
Fundamental analysis is the study of the underlying value of a particular asset based on the economic and industry conditions that impact it. Fundamental analysts try to determine whether commodity prices will rise or fall, based on expectations about supply and demand, and historical and current data. This may include studying historical and current data on weather, inventories, and economic factors.
Technical analysis is the study of trading behavior and market timing. It is used to predict the future price movements of an asset. In other words, a technical analyst examines the patterns of a stock’s price movements and, based on these patterns, makes a forecast about where the stock’s price will go in the futures contract. A technical analyst looks for bullish or bearish patterns in price charts and moving averages.
Both technical and fundamental analyses are necessary to understanding market behavior. We will spend the bulk of this chapter examining some of their most important concepts.
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