Futures Trading: Extrinsic Effects

External Factors Impacting Futures #

Geopolitical Events #

Geopolitical events hold significant influence over the markets, with both immediate and profound effects. These events can disrupt investor sentiment, leading to market responses. Additionally, institutional algorithmic trading systems, relying on news and social media scanning, can trigger massive buying or selling of futures contracts within moments. When multiple systems execute similar trades or the trading volume is substantial, it can result in market-moving effects. Geopolitical events have the potential to disrupt market balance, impacting traders regardless of whether they follow technical or fundamental approaches. For example, news concerning the Middle East can significantly impact the oil market, while events like Brexit can affect not only the British pound but also other currencies. Political instability in cocoa-producing regions, such as the Ivory Coast, can cause abrupt price movements. It is crucial to recognize that news reflecting fundamental changes or market sentiment can both move the markets and expose positions to significant risk. Furthermore, considering the liquidity of a contract is important, as less liquid contracts tend to exhibit more violent price swings.

Economic Cycles #

Economic cycles, also known as business cycles, refer to the fluctuation between expansion and contraction in the economy, representing periods of growth and recession. These cycles are influenced by fundamental factors such as interest rates, employment levels, consumer spending, and gross domestic product. While accurately pinpointing or timing changes in the economic cycle is challenging, it is possible to identify different stages of the cycle based on lagging economic data. For instance, a recession is confirmed when the economy experiences two consecutive quarters of decline. Predicting the beginning of a recession, however, is considerably more difficult, if not impossible. Understanding the stages of the economic cycle can help traders navigate market conditions and adjust their strategies accordingly.

Seasonality #

Seasonality refers to predictable cycles within a specific commodity class throughout the calendar year. These cycles impact the supply and demand for certain commodities, influencing their prices. For example, heating oil experiences increased demand during winter months, leading to price rises. Similarly, gasoline demand tends to surge during summer months due to vacations and travel, resulting in higher gasoline prices. Many commodities exhibit consistent seasonal patterns throughout the year. Recognizing and capitalizing on these cycles can provide traders with insights into price fluctuations and aid in developing trading strategies for commodities driven by seasonal factors.

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