When it comes to different trading styles there are dozens. These strategies can be extremely complicated or simple. It’s just a matter of what you’re looking for and your personal trading preferences. Different approaches are used by commercial and speculative interest traders alike. Although the goals of each market participant might appear different, in actuality they’re very much the same. Hedgers and speculators trade the futures markets in order to use movements of grain prices to their advantage. Speculators look to risk capital and gaining a possible return for doing so, while hedgers look to mitigate risks associated with market exposures. The following is a look into a couple of the commonly-used trading strategies to do just that.
Many market participants use spreads to trade futures markets. Spreads can be implemented in a number of different ways. For example, a simultaneous long and short position can be used for intra market trades. Intra market relationships of grain prices have a couple of tendencies that can be taken advantage of with this notion. Bullish grain markets with rising prices are usually associated with futures markets in or approaching contango. This simply means that the front month contracts are more expensive than the back month contracts. If a speculator is bullish, but doesn’t necessarily want to put on a naked long position, he or she might consider getting long a near month contract and short a back month contract. If the market is already in contango, this spread is profitable when the difference between the contracts grows. If the market is in backwardation, which is the opposite of contango, then the trade gains in value when the difference shrinks until prices completely converge and the market transitions into contango. This trade may have a reduced level of risk when compared to a simple long because the contracts are correlated. If you were bearish on the grain prices of a particular market; the opposite trade serves the same purpose as the market may be in or approaching backwardation.
Another common way to use spreads is with seasonal trading strategies. Seasonal trading is based around deviations from historical fundamental means. Traders look at statistics from prior years including: acreage, yield, consumption, exports, imports and ending stocks. A good way to take advantage of this notion is through inter-market spreads. Let’s say for a hypothetical example that the coming year’s harvest is going to experience a fair amount of global growth in wheat production and a decline in corn production. Consumption is expected to be nearly consistent with the prior year. Using new crop contracts, you could make a play on this trend with a long corn /and / short wheat trade. The nice thing about such a trade is that overall movements of grain prices, whether bullish or bearish, are irrelevant. All you care about is the relationship of wheat prices to corn prices. Seasonal trading with spreads is a good tool for trading both inter and intra market spreads.
Fundamental factors, seasonal and weather trends, and current events may have already been factored into the markets. Read a recently updated Futures Press Report on why wheat might have fundamental influences that drive prices to recent historical contract highs and beyond! This free report is instantly available by clicking FREE WHEAT REPORT.
Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
