Futures For You
| INSIDE THE FUTURES WORLD
Want to learn how the futures markets really work? Dan O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com), responds to your questions about today's futures markets.
To submit a question, post your question to our website at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. |
Dan O'Neil |
ANALYSIS PARALYSIS
I know some traders prefer the charts and graphs of technical analysis while others focus on fundamental factors. Which method is a better means of figuring out the futures markets?
This is an age-old debate in the futures markets, mainly because there is no one right answer. While some traders swear by the fundamental factors affecting the markets they follow, others pay little or no attention to the news and rely more heavily upon various statistical models to make their trading decisions. It's possible to succeed with either approach; it depends on the style and preferences of the individual trader. Let's look at both methods.
* Fundamental analysis. Traders who favor fundamental analysis examine an array of economic, social, and political news to determine how to value underlying commodities and predict future price movements. The vital tools of fundamental analysis are the macroeconomic indicators that may affect supply and demand of any given product, including crop reports, government statistics, and weather events.
* Technical analysis. Technical analysis proposes that all current market information is already reflected in the price of a given commodity, so studying price action is all that is needed to make informed trading decisions. Traders who prefer technical analysis focus on price movements, attempting to gauge the future direction of prices based on the trends and patterns of historical data on charts. Early identification of trends is essential to successful technical analysis.
Technical analysis is perhaps the most widely used method for trading financial and commodity futures, and some say the fact that so many traders are looking at the same trading indicators creates a self-fulfilling prophecy. As indicators approach key technical levels, a significant number of traders will place trades in the same direction, forcing price action to react to indicators. As an example, support and resistance are price levels at which the market should reverse direction. If many traders see a major support level below the current market price and they place buy orders around this level, buying interest should overwhelm selling pressure and the market should be prevented from moving any lower. Conversely, if many traders see a major resistance level and place sell orders near this level, selling pressure should be strong enough to keep the market from going any higher.
Which is the right method for you? That depends. While technical analysis requires a healthy learning curve, most experts agree that many futures markets tend to follow certain patterns and trends over time that can be gleaned from an accurate reading of charts. Technical analysis also allows traders to develop an emotionless system for buying and selling, and is ideal for those traders interested in following multiple markets. Fundamental analysis, on the other hand, involves a wider range of data inputs, and interpreting these sometimes conflicting pieces of information can be cumbersome.
While the effects of various news items and economic reports on a commodity or currency can be interesting to observe, the sheer amount of potentially significant data available probably makes fundamental analysis better suited to the trader who wants to focus on only one or two products. However, while some traders may subscribe religiously to either technical or fundamental analysis only, in reality most eventually settle on a system that combines elements of the two.
HELPING HANDS?
I'm ready to start trading the futures markets, so I need to select a broker. But the commission rates I've come across in my research are all over the map. How do I differentiate among so many choices?
Choosing a futures broker is one of the first and most important decisions you'll make as a new trader. While there are a host of brokerage firms from which to choose, they basically fall into one of three main categories -- full service, self-directed, and deep discount.
Full-service brokers can be a good option for new traders who prefer the advice and guidance of a professional on the majority of their trading decisions. Full-service brokers justify their high commission rates with the trade recommendations they are able to pass along to the trader, usually complemented by an extensive research component. However, the reality is that the Internet has put many of the tools once available only to professional brokers into the hands of every individual investor. While traders used to have to pay high commissions for access to information that full-service brokers controlled, that's no longer the case.
Brokers serving self-directed traders provide an arsenal of news and research tools that allow clients to make their own decisions. Self-directed brokers typically operate at a substantial discount to their full-service counterparts, but generally shift the burden of research and specific trades to the customer, with support only for questions about the markets or the trading platform. Self-directed brokers are a good option for traders who have a solid grasp on trading basics, but still like to talk to someone for help when necessary. Many online brokerage firms -- including Xpresstrade -- are geared toward self-directed traders. The breadth of tools for trade evaluation and execution, as well as the level of service, may vary between brokers. For the best trading experience and to maximize your chances for success in the futures markets, choose a broker that offers a full suite of goodies and backs it all up with quick, knowledgeable support.
Finally, a deep-discount broker is a bare-bones operation, providing execution-only services for the lowest commission rates. Daytraders and other high-volume individuals often go this route, preferring the low costs and minimal bells and whistles. However, while a low commission rate may be attractive to almost any investor, most deep-discount brokers tend to deliver the minimum, meaning service and reliability are often not high priorities, and you may not enjoy a full package of trading tools and resources. Newer traders who aren't comfortable facing the markets completely on their own -- and even intermediate and advanced traders who need or expect a more complete online futures trading package -- might want to avoid the deep-discount category.
Originally published in the April 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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