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Chapter 8. The advanced futures trading course (or how to analyze the market...

Chapter 8. The advanced futures trading course (or how to analyze the markets technically)

If you work for the global commodity trading firm Cargill and have access to timely, accurate (and no doubt expensive) fundamental information, while this might not be all you need, the odds are it's better than what the rest of us are getting. It is Nestlé's business to know how the cocoa crop in the Ivory Coast is developing. Although you might read a brokerage house report that discusses the “witch's tail disease” and its potential to devastate the crop, Nestlé has its man in the Ivory Coast, with another in Brazil for that matter, walking the fields. Nestlé and Hershey both have a better feel for just how good or bad the crops are than you'll ever have (and they have no reason or obligation to share this information with the rest of us).

Let's say, for example, that the cocoa crop is deteriorating. A confidential communiqué is wired to Switzerland, and the people in charge of purchasing for Nestlé get busy. One aspect of their job is to hedge by buying cocoa futures in London or in New York. If the odds favor the supply dropping, there's a good chance of prices rising when the news hits the wires. Protecting against future price risk is what hedging is all about. The Nestlé traders will, as quietly as they can, accumulate new crop cocoa futures long before you know what they're up to, but there's a catch. Nobody is able to accumulate a large position, either on the long or short side, without leaving “footprints in the sand.” Large, significant, “informed” volume must be reported according to Exchange rules and inevitably will move price. This is what technical analysis is all about—analyzing past and current price action to project future price action.


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