Some inexperienced traders have asked me how to learn and understand the “fundamentals” of the futures market. I would like to answer that there is no quick or easy way to study these factors, and honestly, I am not sure how many materials are dedicated solely to analyzing the fundamental factors that influence the futures market. The reason for this is that there is a lack of resources that analyze the fundamentals of the futures market as the topic is extremely vast.
Weather, global political situations, taste preferences and consumer demand, the ability to supply physical goods of a commodity, inflation, interest rates, currency value, natural disasters, etc., are just a few of the macroeconomic factors affecting the market.
I have had the fortunate opportunity to work in the futures market industry. When I was a reporter and editor for FWN, my job required me to learn extensively about the fundamental factors influencing futures markets in the U.S. and other markets worldwide. I had to interact daily with many business people and analysts over twelve years because I was responsible for covering the fundamental factors affecting the futures markets. Indeed, not many people have had this “privilege” of gaining insight into the fundamental factors of the market.
It is important to note that these fundamental factors change frequently in markets. So, what is reported today in publications like the WSJ or other magazines about market fundamentals might be outdated the next week or even earlier.
Many people in the trading industry may feel completely lost when trying to trade in a futures market simply because they are not familiar with the fundamentals affecting that market. That’s just how it is. As I said earlier, continuously learning and following the fundamental factors of one or many futures markets requires you to be a professional trader, or even someone who specializes in it. Let’s assume most speculators in futures markets are professionals, and if you’re an average trader, just taking it as a hobby or side job, then what should you do?
First, studying market technical analysis will eventually lead you to a dilemma when trying to understand the fundamentals and how they affect prices in the futures market. Remember, price activity and historical prices of a futures market, including the number of contracts traded (lots), are a reflection of a combination of news and/or fundamental factors that every professional trader should know. Price activity also leads to business strategies and speculative ideas that shape the market’s future outlook, which in turn creates new market news.
To avoid feeling lost when entering the market, here are some suggestions for learning and understanding the essential fundamentals of the market:
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You should know how to trade, the rise/fall in price, the size of the contract (for Robusta coffee on the ICE futures market, it’s 10 tons per contract), whether it’s a physical delivery or cash settlement, and the dates for the first notice day and the last trading day. This information is freely available online.
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The internet is a great tool to help you learn about the fundamental factors of the futures market—and it’s free! Just click and search for the website you need.
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You must anticipate what will happen in the fundamental factors: Professional traders often forecast and use these forecasts to influence prices before the factors actually occur. This is something that happens regularly. For example, for heating oil: demand tends to rise in late fall and throughout winter, and it’s obvious that heating oil prices increase during that period compared to the summer. New traders might think there’s no need to buy heating oil contracts for December this October. However, they may not realize that professionals have already adjusted the price for December contracts well ahead!
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Countries regularly release economic reports, and commodity associations publish reports, industry news, and related indices. Make time to read them and make your own forecasts of what will happen in the futures market.
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If you are trading financials in futures markets, you should at least have a professional news outlet or magazine. Collect news from various sources, link it to the market you’re trading in, and protect yourself. For commodities like cotton, coffee, or cocoa, basic information is harder to find because it requires paid access. U.S. Department of Agriculture reports on crop forecasts and weather conditions are especially important for your trading.
This does not mean that studying the fundamentals of the market is everything. But understanding it can be a useful tool among many to build your foundation for success.
In futures trading, the more tools you know how to use, the greater your advantage will be.