It’s All About The Dollar

By : Captain Hook - Treasure Chests.com

That’s right folks, it’s all about the dollar ($) in the financial markets these days, and the $ is all about its accelerating debasement at the hands of the Fed. This of course must be rubber stamped by the politicians to be considered ‘legal’, however it should be understood there’s nothing legal about this as the destruction of the $ via fiat declaration is fundamentally unconstitutional. Fiat currencies all fail in the end due to corruption and deceit, and the $ will be no exception, first loosing it’s purchasing power, now well underway, and then its status as the world’s reserve currency, now coming into focus, which will collapse the US into a banana republic.   So, for these reasons the $ is falling. And with foreclosuregate now on deck to provide justification, acceleration in the $’s debasement rate can be justified by the plutocrats, meaning the $’s future is fait accompli. This is of course why gold and silver keep pushing higher, as alternate currencies and a store of wealth. The timing associated with all this is always a wildcard, however as per our excitement the other day, it appears our system remains in tact, with gold continuing to tick higher along with the open interest put / call ratio for GLD into expiry tomorrow. The thinking here is the squeeze will expire with ETF and precious metal share index options tomorrow, which are at elevated levels enabling the squeeze, and then prices will correct beginning next week.   Of course it’s also possible gold could keep on trucking next week as well, which would be post ETF and precious metal share index (and the shares) options expiry this Friday. This is possible because speculators are gaming a QE2 announcement on November 3rd, which is looking very much like a ‘buy the rumor sell the news’ set-up if you ever saw one. What’s more, this would also be a perfect sell point for a November high off a May low, which is a common trading pattern for the sector. For this reason then, I would consider such an outcome the outside date for an intermediate degree high within the secular bull.   And while such a top might not last long all things considered, if the Republicans / Tea Partiers change the political landscape in just a few short weeks from now, then thoughts of austerity might be entertained as well, which could send the equity complex reeling, including precious metals. In terms of volatility, if the chart of the CBOE Volatility Index (VIX) featured below is any indication, it’s oversold condition will need to be worked off at some point, putting options expiry tomorrow in view considering open interest put / call ratios for both the VIX and VXX were low and falling. (See Figure 1) Figure 1   The good part about the Republicans regaining control of the government again however is it will be easier for Ron Paul to audit the Fed and the US gold reserve, assuming one still exists. In fact, it might be this that sparks the next rally after we have a little correction possibly running into December. And if it’s not this that sparks the next phase of the rally in precious metals, don’t worry, the threat of a systemic meltdown because of the foreclosure halt will do it, no matter who is in power. Why? Because no matter what the Republicans or Tea Partiers say, the money to bail out the banks and keep the economy’s wheels greased will need to be printed, and it will be you can count on that.   This is of course why the $ has been falling. And you should know that past a bounce off shorter-term support indicated below, long-term the $ is poised for collapse not only from a fundamental perspective (discussed above), but also technically. The chart below tells the story. I cannot remember seeing a more bearish chart pattern, with indicators poised to plunge, in quite some time. So again, past a technical bounce off of support possibly beginning as early as today or tomorrow, the $ appears doomed, with an ultimate Fibonacci resonance and head & shoulders pattern target of approximately 30, believe it or not. (See Figure 2)   Figure 2   Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. As you will find, our recently reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover. And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive, where you will find our track record speaks for itself. Naturally if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters. Good investing all.

Captain Hook

Treasure Chests.com  

 

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit their web site at Treasure Chests

Where Is the Best Place for Stop Loss and Limit Orders - By Vahid

Stop Loss and its proper position is the question that I have been asked by forex traders so many times. What is the best place to put the stop loss and limit orders?




Stop loss is a must. You have to have it when you trade even if you are an intraday trader and you sit at the computer and watch the price movement and all your positions are closed at the end of your trading day.



Stop loss position is very important. Sometimes having a tight stop loss will be nothing but a loss because it will be triggered even when you choose the right direction.



Stop loss should be placed in a position that will be triggered only when the direction you have chosen is absolutely wrong. For example the price is going up. You wait for a reversal signal. The price changes its direction and starts going down and you take a short position. So the pick that the price has made before it goes down is a resistance.



Now a question: When you will be realized that taking a short position has been a wrong decision and the price will keep on going up?



Yes; only when it goes up and breaks the resistance. It means it goes up and goes higher than the point that it changed its direction and went down. Otherwise you have chosen the right direction.



So where should you place the stop loss? A few pips above the pick (resistance) plus the spread.



When you take a short position, you have to add the spread to the value of the point that you consider as the stop loss because when you take a short position (you sell) you have to buy to close the position and when you buy you have to pay the spread to the broker. So your stop loss should be a buy order and you have to add the spread to it. This is very important when you trade with the currency pairs that have a high spread. If you don’t do that, your stop loss will be triggered sooner and when the price has not gone over the pick.



But when you take a long position (you buy), you don’t have to add the spread because you paid it when you bought.



Let me shows you some examples.



1. In this example, you take a short position at 211.74. As I explained above, if the price goes up and breaks the resistance, it means the taken position has been a wrong position. The resistance is at 212.39. To place the stop loss, I add 3 to 5 pips to the resistance plus the spread.



So in this case the stop loss will be 212.39 + 5 pips + 8 pips = 212.52







2. In this example you take a long position (you buy) at 214.37. The support is at 213.56 and the stop loss will be 5 pips under the support line which will be 213.61.







3. Now lets say you take a long position at 1.4642 after the triangle breakout. As you see in the below chart a symmetrical triangle is broken up. The big Bullish candlestick is a good confirmation that the triangle resistance is broken and so you take a long position when this candlestick is fully formed. But where should you place the stop loss?



It is always possible that the prices changes the direction to retest the broken support or resistance but if it succeeds to break the support or resistance after retesting, your position should be closed because it is possible that the price keep on moving against your direction.



In this example, your long position should be closed if the price goes down, retests the broken triangle resistance (will act as a support after breaking), breaks it and then keeps on going down. To determine the stop loss position, you have to extend the triangle broken resistance and then find a suitable position under the broken resistance. In this case it is 1.4588.







As you see there is no special rule for stop loss like “your stop loss should be 50 pips under the buy price…”. Stop loss position is different from one trade to another one even with the same currency pair and time frame. Sometimes your stop loss will be 20 pips under your buy price and sometimes it has to be as high as 200 pips.



When you work with bigger time frames you use the above stages to determine your stop loss position but as the bigger time frames have bigger scales, your stop loss value will be much bigger.



Move your stop loss!



When you see that the price moves to your favorite direction and you are making profit, you should cancel your primary stop loss and set anther one, higher than the primary stop loss. For example you have bought EUR-USD at 1.4246 and your primary stop loss is 1.4588. The price goes up for 50 pips. You will have to move your stop loss 50 pips higher which is 1.4638. Then if it kept on going up for 50 pips more, you will have to move your stop loss 50 pips higher than the second stop loss.



This is a good technique to maximize your profit when the price keeps on moving to your direction for a long time. But keep in your mind that it doesn’t mean that you have to wait until the price hits your stop loss. To protect your profit, when you see a clear reversal signal, you should close your position immediately and before it hits your stop loss.



50 pips in this example is just an example and is not a rule that has to be obeyed in all trades. It depends on the conditions and trade. For example when you just open a position at the beginning of a candlestick, you have to wait for the candlestick to be formed completely and then decide if you want to move your stop loss or not. You don’t move your stop loss immediately when the price moves to your direction.



Ok! Hope the above explanations were clear enough and you learned how to set your stop loss. In case you have any question, just leave a comment and I will get back to you shortly.



How about limit?



Limit is a good thing to fix your profit before you lose it and of course it is a good thing to limit and control your greed. It is better to keep a trade as long as it is moving to the favorite direction and there is no reversal signal but you can set a limit and fix your profit. You should not get upset if the price keeps on moving to the same direction for several hundreds of pips after hitting your limit. You are already out of the game.



Determining the limit can be very easy if you make a rule for yourself. For example you say “I will be happy with 20 pips and want my position to be closed when I have made it”. But it can be hard and complicated if you want to determine the final destination of the price and set your limit according to it. It is always possible that the price doesn’t move according to your predictions and so it changes its direction before hitting your limit. So you have to be careful.



If you like to earn the maximum profit, you have to determine the final destination of a trend. This can be challenging. First you have to find all the supports and resistances. You have to use the Fibonacci levels in the best way. When you have a long position, any of the Fibonacci levels can reverse the price and so they can be your limit.



The only case that is easy to determine the limit is trading a channel which is when the price is moving inside a channel and goes up and down between a support and resistance line. But even in this case, sometime the price changes its direction before it hits the limit.



What is OCO?



OCO stands for One Cancel Other. An OCO order includes a stop loss and a limit order. Any of them that becomes triggered, the other one will be cancelled automatically and so it will not be triggered later.



The last thing I want to say is that keep in your mind that you MUST cancel all the pending orders including stop loss and limit when one of them is triggered or you have closed your trade by yourself otherwise you will be in trouble because they will be triggered when you have no position and you are not at the computer and so they will open a new position and you don’t know where the price will move. It can be ended to big losses. I have lost a lot of money because of this stupid mistake. So be careful.

CÁC YẾU TỐ ẢNH HƯỞNG ĐẾN GIÁ VÀNG

(Sưu Tầm)

Có rất nhiều yếu tố ảnh hưởng tới giá vàng. Các yếu tố quan trọng nhất có thể kể đến bao gồm : lạm phát, giá dầu, giá trị đồng USD, tình hình địa chính trị thế giới, khủng hoảng kinh tế, cung và cầu vàng vật chất, chu kỳ mùa, lượng dự trữ của các ngân hàng trung ương, yếu tố hành vi - tâm lý và các mức cản kỹ thuật của các chuyên gia phân tích,… Trong thời gian gần đây, sự thao túng của giới đầu cơ đã làm nhiễu loạn thị trường trong một số thời điểm.

Các Ngân Hàng Trung Ương:

Các NHTW giữ một vai trò quan trọng trong ảnh hưởng đối với giá vàng. Xu hướng các NHTW ngày càng gia tăng dự trữ bằng vàng thay thế USD. Ngoài việc mua bán vàng, các NHTW còn tác động đến hoạt động cho vay, hoán đổi và các công cụ phái sinh khác. Hầu hết các NHTW đều phải báo cáo lượng vàng dự trữ họ đang nắm giữ cho Quỹ Tiền Tệ Thế Giới IMF vào cuối mỗi tháng. Tuy nhiên có một số NHTW mà lượng vàng họ nắm giữ không dùng vào mục đích dự trữ nên sẽ không báo cáo cho IMF.

Lượng bán vàng cam kết của các NHTW: hiệp ước CBGA gồm 2 giai đoạn từ năm 1999 đến 2004 và từ 2004 đến 2009, các NHTW đã ký cam kết “Hiệp Ước Bán Vàng Của Các Ngân Hàng Trung Ương” giai đoạn 2 vào 8/3/2004,bao gồm các NHTW của EU, Thụy Sĩ và Thụy Điển đồng ý giới hạn lượng vàng bán ra của họ trong vòng 5 năm bắt đầu từ 28/9/2004, các thành viên hiệp ước đồng ý cam kết khối lượng bán tối đa là 2500 tấn. Tuy nhiên cho đến giờ lượng bán của họ thường không đủ như đã ký kết.

Lạm phát :

Giá vàng thường tỷ lệ thuận với sự gia tăng của lạm phát

Trong thời kỳ lạm phát cao, tiền giấy mất giá người ta có xu hướng đầu tư vào vàng để giữ giá trị tài sản, vàng là tài sản hữu hiệu để tích trữ và giá trị không tùy thuộc vào sức khỏe bất kỳ nền kinh tế nào. Vàng là công cụ tài chính hữu hiệu để phòng ngừa lạm phát. Thông thường để đối phó với tình trạng lạm phát tăng cao, thị trường có khuynh hướng mua vàng với kỳ vọng giá trị tài sản sẽ không bị giảm sút .Các quỹ đầu tư, đầu cơ cũng mua vàng với mục tiêu là sử dụng vàng như một phần tài sản đảm bảo giá trị quỹ trong trường hợp lạm phát cao hay kinh tế suy thoái, giá chứng khoán sụt giảm….

Giá dầu:

Một quy luật bất thành văn trên thị trường từ trước đến nay là giá vàng thông thường luôn luôn tăng gấp 10 lần so với giá dầu.Do giá dầu có khả năng tác động mạnh đến lạm phát nên nó cũng sẽ tác động mạnh đến giá vàng.

Bất ổn địa chính trị :

Khủng hoảng chính trị, khủng hoảng kinh tế, chiến tranh, khủng bố, thiên tai… : là các yếu tố tác động mạnh tới giá vàng. Vàng là nơi trú ẩn an toàn khi có bất ổn xảy ra !

Cung và cầu vàng vật chất :

Nhu cầu tiêu thụ: nhu cầu tích trữ, làm nữ trang, dùng trong công nghiệp…ngày một tăng làm giá vàng tăng theo. Điều này thể hiện rõ nét trong chu kỳ kinh doanh vàng đặc biệt của một số nước như mùa cưới hỏi ở Ấn Độ, dịp tết ở Trung Quốc,…Lượng cầu tăng làm giá vàng tăng và ngược lại.

Lượng sản xuất: Theo Hội Đồng Vàng Thế Giới, khối lượng vàng sản xuất được  trong các năm gần đây khoảng 2500 tấn/năm. Khối lượng sàn xuất vàng của các công ty khai thác vàng hàng đầu thế giới cũng tác động không nhỏ tới giá vàng. Hiện tại, Úc, Trung Quốc, Châu Phi là những nơi sản xuất vàng chủ yếu của thế giới.

Giá trị đồng USD :

Giá trị USD có tương quan tỷ lệ nghịch với giá vàng. Chính vì thế, việc kinh doanh vàng phải đặc biệt theo dõi sức khỏe của nền kinh tế Mỹ và giá trị đồng USD.

Các mức giá tâm lý và kỹ thuật :

Các mức giá tâm lý và kỹ thuật ảnh hưởng lớn tới hành động mua và bán trên thị trường vàng. Hiện tại, mức giá “1000” đang là mức tâm lý vô cùng quan trọng.

Các mức cản tâm lý khác đã tác động nhiều đến giá vàng trong quá khứ như : 500, 600, 700, …

Các mức cản kỹ thuật do các chuyên gia khuyến cáo như 950 , 992, ..hoặc các mức giá đã xuất hiện trong quá khứ như 732, 850, …tác động rất lớn đến các lệnh mua , bán hoặc dừng lỗ, chốt lời.

Sức khỏe các nền kinh tế lớn :

Việc phân tích sức khỏe của các nền kinh tế lớn, đặc biệt là Mỹ, đồng thời với việc phân tích giá trị các đồng tiền giúp ích rất nhiều đến việc kinh doanh vàng.

Một số yếu tố khác :

v     Sự can thiệp của chính quyền vào quá trình khai thác khoáng sản cũng ảnh hưởng lớn tới giá vàng. Chính sách của quản lý tài chính của các chính quyển cũng là một yếu tố cần xem xét khi đầu tư vàng.

v     Tin tức liên quan đến các công ty khai thác vàng, các mỏ vàng, …cũng ảnh hưởng đáng kể tới giá vàng.

v     Việc kinh doanh vàng trên sàn giao dịch ETFs: sự ra đời của loại hình kinh doanh này đã tạo nên cơ hội kinh doanh vàng thuận tiện, hiệu quả cao cho giới đầu tư và là một trong những nhân tố tác động đến giá vàng tăng cao trong những năm gần đây.

v     Giới đầu cơ đang có nhiều động thái tác động nhiều đến giá vàng thế giới. Sự phân tích kỹ hành động của giới đầu cơ có thể giúp ích cho hoạt động kinh doanh vàng.

v    
Tâm lý người tiêu dùng bắt đầu quen với việc giá vàng tăng cao. Tâm lý đám đông thường xuất hiện khi giá vàng tăng mạnh hay giảm mạnh.

v     Quá trình bảo hiểm của các nhà sản xuất vàng lớn: các công ty sản xuất vàng thường có chiến lược bảo hiểm giá vàng cho số lượng vàng sản xuất theo kế hoạch trong tương lai thông qua việc thực hiện các nghiệp vụ như forward, option,.. tuy nhiên quá trình này không phải lúc nào cũng được thực hiện mà tùy theo chu kỳ biến động giá vàng. Thường thì khi giá vàng đang trong chu kỳ tăng mạnh thì các nhà sản xuất tính toán lại và hạn chế việc bán trước lượng vàng sẽ sản xuất.

v     Giá kim loại khác như đồng, bạch kim,…cũng có tác động tới giá vàng theo tỷ lệ thuận.

Why Buy Gold and When to Sell Gold

 Why buy gold and when to sell gold is not as difficult as it seems.

On the-privateer.com it states, " In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a political metal. In the true meaning of the word, its price is "governed".

"This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system."

Throughout history, up to August the 15th 1971, in fact, there has always been a link between paper money and gold. The history of money is littered with the connections. Either gold itself was used as a currency, or if paper was used it was backed by or represented a value of gold.

Since that fateful day in August 1971 however, the successful action of having a medium of exchange was dropped and paper itself was called upon to represent value. But paper currencies hinge on the concept that the debt on which they are based will be repaid. The only way this is being done currently is with more paper money.

Richard Russell, editor and publisher of the Dow Theory letters commented in a recent post on his website:

"Quotes are great if you own stock in a public company in a big bull market. But the great majority of amateur investors make more money holding their homes over the years than they ever make in the stock market. And the reason is that if they own a home over the years, and that home is sensibly financed, they aren’t scared out their home by those damnable quotes during bear markets.

Holders of gold might mull over the same concept. Sure gold is quoted every hour of the day around the world. Long-term holders of gold might do well to ignore the quotes. If gold doubles in price, so what? -- are you going to swap your gold for paper? If gold drops by a third, so what? – are you going to dump your gold for paper?

Why not just relax and hold your gold? Hold your gold – why? The reason is that gold is the only true money, it's the only money that remains wealth no matter what happens in the world. Gold is wealth during the biggest boom and gold remains wealth during the worst depression. So why dwell on the daily dollar price, even though gold is quoted everywhere every hour of the day? Forget the bloody quotes, just accumulate gold. It's a good thing to have in today's unstable world."

So in short, that answers the question, why buy gold and when to sell gold.

How to Buy Gold and Silver on the Comex

This article is about how to buy gold and silver on the Comex. Firstly, for those unfamiliar with the Comex, it gives a brief overview of how it works and how futures contracts for gold and silver work. Then there is some information that an investor might want to use to buy gold at spot on the Comex Exchange.

In all activities of this sort it is highly advisable to consult with your financial advisers and brokers before embarking on any futures contracts.

Real Gold & Silver vs Gold & Silver Spot Price
Currently there is an unprecedented shortage of physical metal in the real gold and silver bullion markets. It is very difficult to buy physical gold and silver and the premiums (the amount over the spot price charged by dealers) are the highest since the 1980s and the waiting period is blowing out to 8 weeks or more for delivery.

In view of the increasing financial instability now worldwide, more and more people than ever are seeking physical gold and silver.

Yet, after an understandable climb in the gold and silver prices during the middle of the year when the 'credit crisis' really began to emerge, the spot price of gold and silver is falling. This is contrary to normal economics as, traditionally, in any past crisis , the value of gold and silver would consistently rise.

But nowadays, the spot price and the comex price, no longer reflect the true price of gold and silver in the market. Why is this so one might ask? Usually one would expect when a shortage of a commodity occurs, then the price would rise commensurate with the unavailability, and then more of the commodity should enter the market to make up the short fall, resulting in a balance being struck between the price and the commodity. Yet here we have a widening gap between the 'apparent' price of gold and silver and the availability of it.

To answer this conundrum and, possibly take advantage of it, we need to look at a number of issues. The first of which is, what is the comex or spot price of gold and silver?

If you already understand about the Comex you can skip this part.

What is the Comex
There used to be two exchanges in New York. The New York Mercantile Exchange and the Commodity Exchange, Inc (COMEX). In 2006 these two exchanged merged and became one. It is now the New York Mercantile Exchange (NYMEX) but is divided into two parts, the NYMEX Division upon which is traded such commodities as oil, gas, palladium and platinum and so forth, and the COMEX Division on which gold, silver copper and aluminum is traded. It is this exchange that we are most interested in. On this exchange are traded 'Future Contracts' of gold and silver.

Futures Trading
Futures trading is the basic action of entering into a legal contractual agreement with another (known or usually not known) individual to exchange money or assets of some value at some time in the future and with the pre-determined price (called a futures price) based on the underlying asset. Such an asset could be stock, an interest rate even or, in this case gold.

It is an agreement to exchange the underlying asset, or equivalent cash flows, at a future date.

In other words if you enter into such a contract you are betting that the value or price of that asset or stock or gold is going to be at a certain value at a predetermined time in the future. At that time, when the contact is completed and 'settlement date' arrives, you or the other party cough up with the difference between what was originally paid and what the settlement price is.

One of the perceived advantages of futures trading is that you do not have to put up all the money needed for the contract but usually only a percentage. Usually around 10 percent. This means that people can trade with a smaller amount. It is rather like going to the races and placing a bet for 1000 dollars but only putting 100 dollars down. If you lose you have to come up with the 1000 dollars of course but if you win you have only needed 100 dollars to play the game. There are some other factors of course that an investor in futures trading can come a cropper with, such as a drop in the price of the commodity resulting in more money being demanded of one by the broker. This happens only too often and many people over commit themselves and so can lose more than the shirt of their back this way. It takes good knowledge and due diligence and an excellent financial advisers and broker to play in the futures market.

Both parties of a futures contract must fulfill the contract on the settlement date. The seller then delivers the commodity to the buyer, or, more often than not, it is a cash-settled future, and cash is transferred from the futures trader who sustained a loss to the one who made a profit.

Incidentally, you can bet both ways of course, that the price will go up or down.

Gold & Silver Futures Trading
In this case the futures traded are gold or silver and done through the Comex, the marketplace where one buys and sells specific quantities of gold or silver, in the form of a futures contract, at a specified price with delivery set at a specified time in the future. The preset price is called the futures price and the delivery date is called the settlement price.

In Gold and silver future trading, the precious metal is usually not delivered but a cash settlement is affected. Many institutions who by gold and silver futures contracts, especially banks, will sell short, or in other words sell before the contract expires. However, we are going to look at how one can see the contract through to expiry and then accept delivery of physical gold and silver

What happened with the Comex?
Firstly, to help understand how this works, we might ask the question, why is the Comex price of gold and silver so much lower than the real price of gold and silver?

The “Resource Investor” (www.resourceinvestor.com) noted recently, "In that CFTC (Commodities Futures Trading Commission) report, it surfaced that those few banks took the huge net short positions in gold and silver futures just ahead of the largest and harshest fall in prices for gold and silver since the Great Gold Bull began in 2001 – 2002. The 'Got Gold Report' covered it from the silver point of view earlier this week."

This means that, artificially through a process of short selling on contracts, the price of gold and silver was driven down as part of the effort to boost up the dollar. Of course this only affected the COMEX gold and silver price and had no effect on the real price of gold and silver, which is demonstrably in short supply, except to focus more attention on the ever widening gap between the two.

This has consequently opened up the opportunity for investors and traders in gold and silver to buy at the Comex Price and sell on the open market. There are some costs issues to overcome but these are minor when you look at the difference in the price of the Comex and physical metal.

How to Buy Gold and Silver on the Comex
Taking delivery of a commodity is not usual and some brokers might try and talk you out of it as it involves more work for them. Something they are not keen to do. So you will have to find a broker willing to do the work and be insistent about taking delivery. It is quite legal and in fact that is what the market was originally designed to do.

The following outlines the basics, including the various procedures involved in taking delivery of a gold or silver future contract on the Comex. There are some costs involved of course which will vary with the broker you use.

Whereas, with a cash market you can buy or sell during the term of a contract, to take delivery you will need to wait until the term of the contract expires and you can take delivery. This is called taking a long term. Various entities, such as banks for example, take a short term. They have no intention of taking deliver and so, with the ten percent leverage (remember?) they can take enormous amounts of contracts and sell them short, keeping the price down and, in effect, manipulating the gold and silver price.

But if you intend to take possession you will have to ante up the whole amount required to complete that contract and you would have to wait until the contract expires before you can organise and take delivery.

For example, if a contract was bought today, and the price on the gold contract was between $695 - $735 per ounce, the full value of the contract you bought would be $69,500 - $73,500 per 100-troy ounce. Likewise if the price on the silver contract was between $9.74 - $9.16 per ounce, then it would be $48,700 - $45,800 per 5,000 troy-ounce contract.

These figures would not include any commission charges incurred going through a broker of course and are just an example to illustrate how it works.

Of course, if you did not want to take possession of the metal you could simply enter a position without posting the full contract value, but instead post around 10 percent (The actual percentage may vary depending on your broker and other factors). This is the "margin" which is posted "in good faith". Price can go through some dramatic changes in the any futures market and if the price of gold drops significantly you might be called upon to add funds to your account to maintain your position. (called a maintenance margin) or you might find your position is liquidated. There is usually a risk maintenance level and if your account falls below that level then you would need to top up your account with the requisite funds.

Now, when the time comes to take delivery you will get a Notice of Delivery and the full amount will be debited from your account. So you would be required to have the full contract value deposited in your account with your broker at the price the contract was originally purchased. There would be a few days of processing at the end of the contract but then you would be able to take possession, usually a couple of weeks later.

You can do this in three ways.

You will receive a receipt, which in effect is like a stock certificate, and you could store that. The gold would be in storage in a vault and you would be up for some storage charges, This premium, compared to the gold price, will be minuscule. The gold is kept in storage for you and you can take physical delivery anytime you want of course. This is the first method.

The second is that you could have the gold bullion shipped to a warehouse. You can be put in touch with the vault that contains your gold (generally in or around New York, US) and have brinks or an Armored car transfer your gold to a warehouse or bank of your choosing. There would be more costs involved with this but, again, the charges would not be very much compared to the value of the gold bullion.

Of course you can avoid doing any of this by simply depositing the full value of the contract when you establish the position. Note, you can decide not to take delivery of course at any time and close out your metals position and take a profit or loss depending on the price movement.

Price and Delivery Costs
Usually when the contract is expired and delivered to you it is in the form of a Certificate. Many clients have the broker hold their certificate so the contract can be sold back into the market at a later date. However, In this case you want to take delivery so you would get the certificate from the broker.

The costs involved now will depend upon your broker, usually there is a contract fee and a commission, as well as insurance and storage fees. The gold can stay where it is and simply be stored for a regular fee.

However, IF you want to take it out of the Comex warehouse and have it stored elsewhere then it would be your responsibility to organise this. This would be typically done through a security shipping service and arranged storage at a bank vault.

In order to sell the gold or silver back on the comex there is also the addition action required which is to have the gold assayed (assayed: an analysis of a metal to determine the quality and weight of the metal). Any gold removed from the Comex Warehouse must be assayed prior to being sold again on the comex. So this would be an additional cost if you planned to sell it there in the future. However, you can sell the gold or silver to a gold dealer any time without having to have it assayed.

If your intent is to actually receive the physical metal, it is held in storage at specific "delivery points." It is your responsibility to make the arrangements to do this. There are fees associated with removal from the storage facility. In addition, if the metal is taken out of storage, it cannot be sold for delivery on the exchange without being re-assayed.

Some people actually turn up with a SUV, their receipt or certificate and have the gold loaded into the back of the SUV and drive off with it. Not something to tell the neighbors of course.

Of course to do all of this one needs to have an account with a broker who handles, or preferably specializes, in Commodity futures trading on the Comex. You will need to set up an account whereby you have access to broker-assisted trading rather than just trading online.

In step form it goes like this:

Broker holds the receipt in PFG's account for customer
Client buys the futures contract.
Client will take delivery between First Notice Day and the Last Trading Day.
On delivery day account is debited cost plus a small delivery fee.
Receipt is booked to customers account
Monthly storage charge also passed on to customer's account.

For Physical Delivery when the Customer wants the gold or silver bars in their procession
Client buys the futures contract.
Client will take delivery between First Notice Day and the Last Trading Day.
On delivery day account is debited cost plus a small delivery fee.
The broker provides the customer with name and phone number of the individual at the depository to
contact.
Customer makes arrangements for the physical delivery including having the gold or silver assayed if required in order to sell to a dealer.

Last word on Buying Gold and Silver on the Comex
For the new person or one inexperienced in futures trading, it is advisable to only use funds which you can happily afford to lose. It is also advisable to have a broker who fully understands gold and silver futures trading and with which one can build up a relationship. Also always seek the advice of a competent financial adviser prior to making any investment.

Buying gold or silver on the Comex can be a very fruitful exercise and following the above outlines and point will help you to understand a bit more fully how to buy gold and silver on the Comex.

A Trader's Guide To Using Fractals - by Justin Kuepper

Many people believe that the markets are random. In fact, one of the most prominent investing books out there is "A Random Walk Down Wall Street" (1973) by Burton G. Malkiel, who argues that throwing darts at a dartboard is likely to yield results similar to those achieved by a fund manager (and Malkiel does have many valid points). 

However, many others argue that although prices may appear to be random, they do in fact follow a pattern in the form of trends. One of the most basic ways in which traders can determine such trends is through the use of fractals. Fractals essentially break down larger trends into extremely simple and predictable reversal patterns. This article will explain what fractals are and how you might apply them to your trading to enhance your profits.

What Are Fractals? When many people think of fractals in the mathematical sense, they think of chaos theory and abstract mathematics. While these concepts do apply to the market (it being a nonlinear, dynamic system), most traders refer to fractals in a more literal sense. That is, as recurring patterns that can predict reversals among larger, more chaotic price movements.
These basic fractals are composed of five or more bars. The rules for identifying fractals are as follows:

• A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
• A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.

The fractals shown in Figure 1 are two examples of perfect patterns. Note that many other less perfect patterns can occur, but the basic pattern should remain intact for the fractal to be valid.

Figure 1

The obvious drawback here is that fractals are lagging indicators - that is, a fractal can't be drawn until we are two days into the reversal. While this may be true, most significant reversals last many more bars, so most of the trend will remain intact (as we will see in the example below).

Applying Fractals to Trading
Like many trading indicators, fractals are best used in conjunction with other indicators or forms of analysis. Perhaps the most common confirmation indicator used with fractals is the "Alligator indicator", a tool that is created by using moving averages that factor in the use of fractal geometry. The standard rule states that all buy rules are only valid if below the "alligator's teeth" (the center average), and all sell rules are only valid if above the alligator's teeth.

Figure 2 is an example of such a setup:

Figure 2

As you can see, the primary drawback to this system is the large swings that take place. Notice, for example, that the latest fractal had a drawdown of over 100 pips and still has not hit an exit point. However, there are countless other techniques that can be applied in conjunction with fractals to produce profitable trading systems.

Figure 3 shows a forex trading setup that uses a combination of fractals (multiple time frames), Fibonacci-based moving averages (placed at 89, 144, 233, 377 and their inverses) and a momentum indicator. Let's look at a recent trade setup for the GBP/USD currency pair to see how fractals can help:

Figure 3

Here is a basic rule setup that is used when using a chart with a four-hour time frame:

• Initiate a position when the price has hit the farthest Fibonacci band, but only after a daily (D1) fractal takes place.
• Exit a position after a daily (D1) fractal reversal takes place.

Notice how the fractals pinpoint meaningful tops and bottoms? This helps to take the guesswork out of deciding at which Fibonacci level to trade - all we have to do is check to see if the daily fractal occurred. We should also note that the trend strength began increasing at the sell fractal, and topped at the buy fractal. Although we lose some pips with the confirmation, it saves us from losing out on mere market noise - 139 pips certainly isn't bad for three days! (For further reading, see Trading Without Noise.)

Things to Consider
Here are a few things to remember when using fractals:

• They are lagging indicators. They are best used as confirmation indicators to help confirm that a reversal did take place. Real-time tops and bottoms can be surmised with other techniques.
• The longer the time period (i.e. the number of bars required for a fractal), the more reliable the reversal. However, you should also remember that the longer the time period, the lower the number of signals generated.
• It is best to plot fractals in multiple time frames and use them in conjunction with one another. For example, only trade short-term fractals in the direction of the long-term ones. Along these same lines, long-term fractals are more reliable than short-term fractals.
• Always use fractals in conjunction with other indicators or systems. They work best as decision support tools, not as indicators on their own.

Conclusion
As you can see, fractals can be extremely powerful tools when used in conjunction with other indicators and techniques, especially when used to confirm reversals. The most common usage is with the "Alligator indicator"; however, there are other uses too, as we've seen here. Overall, fractals make excellent decision support tools for any trading method.

Resources
These are the two main charting packages that contain fractals:

• MetaTrader for forex
• TradeStation for equities (via plug-in)

If you want to know more about chaos theory and its applications in the marketplace, an excellent book on the topic is "Profiting From Chaos" (1994) by Tonis Vaga

A Forex Trader's View Of The Aussie/Gold Relationship

The relationships between different financial markets are almost as old as the markets themselves. For example, in many cases when benchmark equities rise, bonds fall. Many traders will watch for correlations like this and try to capitalize on the opportunity. The same types of relationships exist in the global foreign exchange market. Take for instance the closely related tie between the Australian dollar and gold. Due mostly to the fact that Australia remains a major producer of the yellow metal, the correlation is an opportunity that not only exists, but is one that traders on every level can capitalize on. Let's take a look at why this relationship exists, and how you can use it to produce solid gold returns.

Being Productive Is KeyThe U.S. dollar/crude oil relationship exists for one simple reason: the commodity is priced in dollars. However, the same cannot be said about the Aussie correlation. The gold/Australian dollar relationship stems from production. As of 2008, Australia was ranked as the fourth-largest gold producer in the world, coming in behind China, South Africa and the United States. Even though it may not be the largest producer, the "Land Down Under" produces an estimated 225 metric tons of gold per year, according to the consultancy firm GFMS. As a result, it is only natural that the underlying currency of a major commodity producer follows a similar pattern to that commodity. With the ebb and flow of production, the exchange rate will follow supply and demand as money exchanges hands between miner and manufacturer. (For related reading, see Commodity Prices And Currency Movements.)

According to a 2005 GFMS survey, the last time Australia was ranked second in production behind South Africa, gold production in the South Pacific economy was at a height of approximately 263 tons per year. This volume made up a commanding 10.4% of the market. However, steadily but surely, production has been decreasing year over year (YOY), helping to drive prices higher. Ultimately, the shorter supply of gold has helped to create demand for the Australian dollar, which moved in lockstep with the commodity until mid-2008. If an investor or trader had taken advantage of this simple correlation, he or she would have earned an approximate 30% rate of return on the currency price alone (aside from any rollover interest associated with the trade). (For more, see Using Currency Correlations To Your Advantage.)

Capitalizing on the RelationshipAlthough the macro strategy does work on all levels, it is best suited for portfolios that are set in longer time frames. Traders are not going to see strong correlations on every single day of trading, much like other broader market dynamics. As a result, it's advantageous to cushion the blow of daily volatility and risk through a longer time horizon.

Fundamentally oriented traders will tend to trade one or both instruments, taking trading cues from the other. These cues can be gathered from a list of topics including:

1. Commodity Reserve Reports
2. COT Futures Reports
3. Australian Economic Developments
4. Interest Rates
5. Safe Haven Investing

As a result, these trades tend to be longer than day-trade considerations as the portfolio is looking to capture the overall market tone rather than just an intraday pop or drop.

Technically, traders tend to find their cues in technical formations with the hope that corresponding correlations will seep into the related market. Whether the formation is in the gold chart or the Aussie chart, it is better to find one solid formation first, rather than looking for both charts to correlate perfectly. An example of this is clearly seen in the chart examples below. 

Figure 1

Source: FX Trek Intellicharts

 

Figure 2

Source: MetaTrader

As shown in Figure 2, with the market in turmoil and investor deleveraging that was "en vogue" in 2008, traders saw an opportunity to jump on the bandwagon as both Aussie and gold experienced a temporary uptick in price. Already knowing that this would be a blow-off top in an otherwise bearish market, the savvy technical investor could visibly see both assets moving in sync. As a result, technically speaking, a short opportunity shone through as the commodity approached the $905.50 figure, which corresponded with the pivotal 0.8500 figure in the FX market. The double top in gold all but ensured further depression in the Australian dollar/U.S. dollar currency pair. (For more insight, see The Midas Touch For Gold Investors.)

Trying It Out: a Trade Setup
Now let's take a look at a shorter trade setup involving both the Australian dollar and gold.

First, the broad macro picture. Taking a look at Figure 2, we see that gold has taken a hard dive down as investors and traders have deleveraged and sold off riskier assets. Following this move, subsequent consolidation lends to the belief that a turnaround may be lingering in the market. The idea is supported by the likelihood that equity investors will elect to move some money into the safe haven characteristic of the commodity as global benchmark indexes continue to decline in value. (To read more about gold's reputation as a safe haven, see 8 Reasons To Own Gold.)
 

Figure 3

Source: MetaTrader

We see a similar position developing in the Australian dollar following a spike down to just below the 0.6045 figure, shown in Figure 4 below. At this time, the currency was under extreme pressure as global speculators deemed the Australian dollar a risky currency. Putting these two factors together, portfolio direction is looking to be upward.

Next, we take a look at our charts and apply basic support and resistance techniques. Following our initial trade idea with gold, we first project a textbook channel to our chart as price action has displayed three defining technical points (labeled A, B and C). The gold channel corresponds with a short-term channel developing in the AUD/USD currency pair in Figure 4.      

Figure 4

Source: MetaTrader

The combination culminates on December 10, 2008 (Figure 3 Point C). Not only do both assets test the support or lower channel trendline, but we also have a bullish MACD convergence confirming the move higher in the AUD/USD currency pair. 

Finally, we place the corresponding entry at the close of the session, 0.6561. The subsequent stop would be placed at the swing low. In this case, that would be the December 5 low of 0.6290, a roughly 271 pip stop. Taking proper risk/reward management into account, we place our target at 0.7103 to give us a 2:1 risk-to-reward ratio. Luckily, the trade takes no longer than a week as the target is triggered on December 18 for a 542 pip profit.

Conclusion
Intermarket strategies like the Australian dollar and gold present ample opportunities for the savvy investor and trader. Whether it's to produce a higher profit/loss ratio or increase overall portfolio returns, market correlations are sure to add value to a market participant's repertoire.

Getting Started in Foreign Exchange Futures - By Justin Kuepper,

The spot foreign exchange (forex or FX) market is the world's largest market, with over one trillion U.S. dollars traded per day. One derivative of this market is the forex futures market, which is only 1/100th the size. This article examines the key differences between forex futures and traditional futures and looks at some strategies for speculating and hedging with this useful derivative.

Forex Futures versus Traditional Futures
Both forex and traditional futures operate in the same basic manner: a contract is purchased to buy or sell a specific amount of an asset at a particular price on a predetermined date. (For an in-depth introduction to futures, see Futures Fundamentals.) There is, however, one key difference between the two: forex futures are not traded on a centralized exchange; rather, the deal flow is available through several different exchanges in the U.S. and abroad. The vast majority of forex futures are traded through the Chicago Mercantile Exchange (CME) and its partners (introducing brokers).

However, this is not to say that forex futures contracts are OTCforward contracts). It is important to remember that all currency futures quotes are made against the U.S. dollar, unlike the spot forex market.

Here is an example of what a forex futures quote looks like:
per se; they are still bound to a designated 'size per contract,' and they are offered only in whole numbers (unlike

Euro FX Futures on the CME
For any given futures contract, your broker should provide you with its specifications, such as the contract sizes, time increments, trading hours, pricing limits, and other relevant information. Here is an example of what a specification sheet might look like:


Specification Sheet from CME

Hedging versus Speculating
Hedging and speculating are the two primary ways in which forex derivatives are used. Hedgers use forex futures to reduce or eliminate risk by insulating themselves against any future price movements. Speculators, on the other hand, want to incur risk in order to make a profit. Now, let's take a more in-depth look at these two strategies:

Hedging
There are many reasons to use a hedging strategy in the forex futures market. One main purpose is to neutralize the effect of currency fluctuations on sales revenue. For example, if a business operating overseas wanted to know exactly how much revenue it will obtain (in U.S. dollars) from its European stores, it could purchase a futures contract in the amount of its projected net sales to eliminate currency fluctuations.

When hedging, traders must often choose between futures and another derivative known as a forward. There are several differences between these two instruments, the most notable of which are these:

• Forwards allow the trader more flexibility in choosing contract sizes and setting dates. This allows you to tailor the contracts to your needs instead of using a set contract size (futures).

• The cash that's backing a forward is not due until the expiration of the contract, whereas the cash behind futures is calculated daily, and buyer and seller are held liable for daily cash settlements. By using futures, you have the ability to re-evaluate your position as often as you like. With forwards, you must wait until the contract expires.

Speculating
Speculating is by nature profit-driven. In the forex market, futures and spot forex are not all that different. So why exactly would you want to participate in the futures market instead of the spot market? Well, there are several arguments for and against trading in the futures market:

Advantages
• Lower spreads (2-3).
• Lower transaction costs (as low as $5 per contract).
• More leverage (often $500+ per contract).

Disadvantages
• Often requires a higher amount of capital ($100,000 lots).
• Limited to the exchange's session times.
• NFA (National Futures Association) fees may apply.

The strategies employed for speculating are similar to those used in spot markets. The most widely used strategies are based on common forms of technical chart analysis since these markets tend to trend well. These include Fibonacci studies, Gann studies, pivot points, and other similar techniques. Alternately, some speculators use more advanced strategies, such as arbitrage.

Conclusion
As we can see, forex futures operate similarly to traditional stock and commodity futures. There are many advantages to using them for hedging as well as speculating. The distinguishing feature of forex futures is that they are not traded on a centralized exchange. Forex futures can be used to hedge against currency fluctuations, but some traders use these instruments in pursuit of profit, just as they would use futures on the spot market.

Futures Fundamentals - Part 2

5. Characteristics

In the futures market, margin has a definition distinct from its definition in the stock market, where margin is the use of borrowed money to purchase securities. In the futures market, margin refers to the initial deposit of  "good faith" made into an account in order to enter into a futures contract. This margin is referred to as good faith because it is this money that is used to debit any day-to-day losses.  

When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. In other words, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract. These predetermined initial margin amounts are continuously under review: at times of high market volatility, initial margin requirements can be raised.

The initial margin is the minimum amount required to enter into a new futures contract, but the maintenance margin is the lowest amount an account can reach before needing to be replenished. For example, if your margin account drops to a certain level because of a series of daily losses, brokers are required to make a margin call and request that you make an additional deposit into your account to bring the margin back up to the initial amount.

Let's say that you had to deposit an initial margin of $1,000 on a contract and the maintenance margin level is $500. A series of losses dropped the value of your account to $400. This would then prompt the broker to make a margin call to you, requesting a deposit of at least an additional $600 to bring the account back up to the initial margin level of $1,000.

Word to the wise: when a margin call is made, the funds usually have to be delivered immediately. If they are not, the brokerage can have the right to liquidate your position completely in order to make up for any losses it may have incurred on your behalf.

Leverage: The Double-Edged Sword

 
In the futures market, leverage refers to having control over large cash amounts of commodities with comparatively small levels of capital. In other words, with a relatively small amount of cash, you can enter into a futures contract that is worth much more than you initially have to pay (deposit into your margin account). It is said that in the futures market, more than any other form of investment, price changes are highly leveraged, meaning a small change in a futures price can translate into a huge gain or loss.

Futures positions are highly leveraged because the initial margins that are set by the exchanges are relatively small compared to the cash value of the contracts in question (which is part of the reason why the futures market is useful but also very risky). The smaller the margin in relation to the cash value of the futures contract, the higher the leverage. So for an initial margin of $5,000, you may be able to enter into a long position in a futures contract for 30,000 pounds of coffee valued at $50,000, which would be considered highly leveraged investments.

You already know that the futures market can be extremely risky and,therefore, not for the faint of heart. This should become more obvious once you understand the arithmetic of leverage. Highly leveraged investments can produce two results: great profits or greater losses.

As a result of leverage, if the price of the futures contract moves up even slightly, the profit gain will be large in comparison to the initial margin. However, if the price just inches downwards, that same high leverage will yield huge losses in comparison to the initial margin deposit. For example, say that in anticipation of a rise in stock prices across the board, you buy a futures contract with a margin deposit of $10,000, for an index currently standing at 1300. The value of the contract is worth $250 times the index (e.g. $250 x 1300 = $325,000), meaning that for every point gain or loss, $250 will be gained or lost.

If after a couple of months, the index realized a gain of 5%, this would mean the index gained 65 points to stand at 1365. In terms of money, this would mean that you as an investor earned a profit of $16,250 (65 points x $250); a profit of 162%!

On the other hand, if the index declined 5%, it would result in a monetary loss of $16,250 - a huge amount compared to the initial margin deposit made to obtain the contract. This means you still have to pay $6,250 out of your pocket to cover your losses. The fact that a small change of 5% to the index could result in such a large profit or loss to the investor (sometimes even more than the initial investment made) is the risky arithmetic of leverage. Consequently, while the value of a commodity or a financial instrument may not exhibit very much price volatility, the same percentage gains and losses are much more dramatic in futures contracts due to low margins and high leverage.

Pricing and Limits

 
As we mentioned before, contracts in the futures market are a result of competitive price discovery. Prices are quoted as they would be in the cash market: in dollars and cents or per unit (gold ounces, bushels, barrels, index points, percentages and so on).

Prices on futures contracts, however, have a minimum amount that they can move. These minimums are established by the futures exchanges and are known as “ticks.” For example, the minimum sum that a bushel of grain can move upwards or downwards is a quarter of one U.S. cent. For futures investors, it's important to understand how the minimum price movement for each commodity will affect the size of the contract in question. If you had a wheat contract for 5,000 bushels, the minimum price movement would be $12.50 ($0.0025 x 5,000).

Futures prices also have a price change limit that determines the prices between which the contracts can trade on a daily basis. The price change limit is added to and subtracted from the previous day's close and the results remain the upper and lower price boundary for the day.

Say that the price change limit on silver per ounce is $0.25. Yesterday, the price per ounce closed at $5. Today's upper price boundary for silver would be $5.25 and the lower boundary would be $4.75. If at any moment during the day the price of futures contracts for silver reaches either boundary, the exchange shuts down all trading of silver futures for the day. The next day, the new boundaries are again calculated by adding and subtracting $0.25 to the previous day's close. Each day the silver ounce could increase or decrease by $0.25 until an equilibrium price is found. Because trading shuts down if prices reach their daily limits, there may be occasions when it is NOT possible to liquidate an existing futures position at will.

The exchange can revise this price limit if it feels it's necessary. It's not uncommon for the exchange to abolish daily price limits in the month that the contract expires (delivery or “spot” month). This is because trading is often volatile during this month, as sellers and buyers try to obtain the best price possible before the expiration of the contract.

In order to avoid any unfair advantages, the CTFC and the futures exchanges impose limits on the total amount of contracts or units of a commodity in which any single person can invest. These are known as position limits and they ensure that no one person can control the market price for a particular commodity.  

6. Strategies

Essentially, futures contracts try to predict what the value of an index or commodity will be at some date in the future. Speculators in the futures market can use different strategies to take advantage of rising and declining prices. The most common are known as going long,  going short and spreads. 

Going Long
When an investor goes long - that is, enters a contract by agreeing to buy and receive delivery of the underlying at a set price - it means that he or she is trying to profit from an anticipated future price increase.

For example, let's say that, with an initial margin of $2,000 in June, Joe the speculator buys one September contract of gold at $350 per ounce, for a total of 1,000 ounces or $350,000. By buying in June, Joe is going long, with the expectation that the price of gold will rise by the time the contract expires in September.

By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell the contract in order to realize a profit. The 1,000 ounce contract would now be worth $352,000 and the profit would be $2,000. Given the very high leverage (remember the initial margin was $2,000), by going long, Joe made a 100% profit!

Of course, the opposite would be true if the price of gold per ounce had fallen by $2. The speculator would have realized a 100% loss. It's also important to remember that throughout the time that Joe held the contract, the margin may have dropped below the maintenance margin level. He would, therefore, have had to respond to several margin calls, resulting in an even bigger loss or smaller profit.

Going Short
A speculator who goes short - that is, enters into a futures contract by agreeing to sell and deliver the underlying at a set price - is looking to make a profit from declining price levels. By selling high now, the contract can be repurchased in the future at a lower price, thus generating a profit for the speculator.

Let's say that Sara did some research and came to the conclusion that the price of oil was going to decline over the next six months. She could sell a contract today, in November, at the current higher price, and buy it back within the next six months after the price has declined. This strategy is called going short and is used when speculators take advantage of a declining market.

Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude oil contract (one contract is equivalent to 1,000 barrels) at $25 per barrel, for a total value of $25,000.

By March, the price of oil had reached $20 per barrel and Sara felt it was time to cash in on her profits. As such, she bought back the contract which was valued at $20,000. By going short, Sara made a profit of $5,000! But again, if Sara's research had not been thorough, and she had made a different decision, her strategy could have ended in a big loss.

Spreads
As you can see, going long and going short are positions that basically involve the buying or selling of a contract now in order to take advantage of rising or declining prices in the future. Another common strategy used by futures traders is called “spreads.”

Spreads involve taking advantage of the price difference between two different contracts of the same commodity. Spreading is considered to be one of the most conservative forms of trading in the futures market because it is much safer than the trading of long/short (naked) futures contracts.

There are many different types of spreads, including:

Calendar Spread - This involves the simultaneous purchase and sale of two futures of the same type, having the same price, but different delivery dates. Intermarket Spread - Here the investor, with contracts of the same month, goes long in one market and short in another market. For example, the investor may take Short June Wheat and Long June Pork Bellies. Inter-Exchange Spread - This is any type of spread in which each position is created in different futures exchanges. For example, the investor may create a position in the Chicago Board of Trade (CBOT) and the London International Financial Futures and Options Exchange (LIFFE).

7. How To Trade 

At the risk of repeating ourselves, it's important to note that  futures trading is not for everyone. You can invest in the futures market in a number of different ways, but before taking the plunge, you must be sure of the amount of risk you're willing to take. As a futures trader, you should have a solid understanding of how the market and contracts function. You'll also need to determine how much time, attention, and research you can dedicate to the investment. Talk to your broker and ask questions before opening a futures account.

 

Unlike traditional equity traders, futures traders are advised to only use funds that have been earmarked as pure "risk capital"- the risks really are that high. Once you've made the initial decision to enter the market, the next question should be “How?” Here are three different approaches to consider:

Do It Yourself - As an investor, you can trade your own account without the aid or advice of a broker. This involves the most risk because you become responsible for managing funds, ordering trades, maintaining margins, acquiring research and coming up with your own analysis of how the market will move in relation to the commodity in which you've invested. It requires time and complete attention to the market.

Open a Managed Account - Another way to participate in the market is by opening a managed account, similar to an equity account. Your broker would have the power to trade on your behalf, following conditions agreed upon when the account was opened. This method could lessen your financial risk because a professional would be making informed decisions on your behalf. However, you would still be responsible for any losses incurred as well as for margin calls. And you'd probably have to pay an extra management fee.

Join a Commodity Pool - A third way to enter the market, and one that offers the smallest risk, is to join a commodity pool. Like a mutual fund, the commodity pool is a group of commodities which can be invested in. No one person has an individual account; funds are combined with others and traded as one. The profits and losses are directly proportionate to the amount of money invested. By entering a commodity pool, you also gain the opportunity to invest in diverse types of commodities. You are also not subject to margin calls. However, it is essential that the pool be managed by a skilled broker, because the risks of the futures market are still present in the commodity pool.

8. Conclusion

 

Buying and selling in the futures market can seem risky and complicated. As we've already said, futures trading is not for everyone, but it works for a wide range of people. This tutorial has introduced you to the fundamentals of futures. If you want to know more, talk to your broker. 

Let's review the basics:

• The futures market is a global marketplace, initially created as a place for farmers and merchants to buy and sell commodities for either spot or future delivery. This was done to lessen the risk of both waste and scarcity.
• Rather than trade in physical commodities, futures markets buy and sell futures contracts, which state the price per unit, type, value, quality and quantity of the commodity in question, as well as the month the contract expires.
• The players in the futures market are hedgers and speculators. A hedger tries to minimize risk by buying or selling now in an effort to avoid rising or declining prices. Conversely, the speculator will try to profit from the risks by buying or selling now in anticipation of rising or declining prices.
• The CFTC and the NFA are the regulatory bodies governing and monitoring futures markets in the U.S. It is important to know your rights.
• Futures accounts are credited or debited daily depending on profits or losses incurred. The futures market is also characterized as being highly leveraged due to its margins; although leverage works as a double-edged sword. It's important to understand the arithmetic of leverage when calculating profit and loss, as well as the minimum price movements and daily price limits at which contracts can trade.
• “Going long,” “going short,” and “spreads” are the most common strategies used when trading on the futures market.
• Once you make the decision to trade in commodities, there are several ways to participate in the futures market. All of them involve risk -  some more than others. You can trade your own account, have a managed account or join a commodity pool.