Futures For You - September 2007

Futures For You

INSIDE THE FUTURES WORLD
Want to learn how the futures markets really work? Dan O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com), responds to your questions about today's futures markets.
To submit a question, post your question to our website at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

Dan O'Neil

GOING SOFT
What are "soft" commodities and where do they trade?
Also known as the "food and fiber" category or the "tropical softs," this market sector is composed of five products traded primarily at the New York Board of Trade (NYBOT) -- coffee, sugar, cocoa, cotton, and orange juice. These products trade both in the physical open outcry pits at NYBOT and electronically on the state-of-the-art Intercontinental Exchange (ICE) platform. In fact, much of the volume in the softs these days has migrated to the electronic arena, where traders can enjoy faster and more transparent trading nearly 14 hours per day.
As agricultural products grown all over the world, these markets are susceptible to not only typical supply and demand factors and growing variables (weather, disease, and so on), but global exchange rates, tariffs, and geopolitical events as well. Although often deprived of the same attention as more mainstream commodities like gold, crude oil, or corn, these products tend to be among the most volatile of all commodities, offering higher levels of risk and reward potential than other markets. As such, their popularity only continues to increase.
Coffee: Coffee has been traded in New York since 1882 and remains today one of the most heavily traded and highly volatile commodities available, acutely affected by production factors in South American countries.
Sugar: Actively traded for decades as a global food staple, sugar has seen increased interest in recent years as a major component in the production of ethanol. As the search for alternative fuels continues, speculation in sugar may only be in its infancy.
Cocoa: While cocoa futures long saw much of their activity in hedges by producers and manufacturers, the uncertainty of the growing process has resulted in an inherent market volatility that appeals to speculators.
Cotton: Cotton is among the world's oldest commodities as well as one of the oldest traded futures contracts in the US. Like cocoa, what was once primarily a marketplace for growers and manufacturers seeking to manage risk, cotton futures have blossomed into a hotbed of volatility and speculative activity.
Orange juice: More than any other soft commodity -- or almost any other agricultural product -- OJ is a true weather market, subject to swings during periods of frost or hurricanes in major growing regions like Florida and Brazil. This volatility and unpredictability has made it a favorite among risk-loving speculators.
CONTINGENCY PLAN
How do contingent orders work?
At first glance, contingent orders -- which allow investors to set up multiple trades that trigger automatically based on market moves or the outcomes of one another -- may appear difficult to manage. However, the main reason that contingent orders have become increasingly popular for futures traders to manage more complex positions is their inherent ease and convenience. These special orders allow users to set up multiple trades at one time without the need to constantly monitor the market to place subsequent, related orders.
Like other trades, a contingent order can only be effective if the investor has a clear idea of the risk involved. While online brokers offer a number of different contingent order types, here are some of the most common:
One triggers other (OTO): An OTO is an order type that gives a trader the ability to place a primary order and often multiple contingent orders simultaneously. When the primary order has been executed, the contingents are automatically triggered and routed to the appropriate market. A common scenario would be to enter a primary order to establish a new position, along with an OTO stop order for protection and an OTO limit order to take profits.
One cancels other (OCO): A pair of orders may be entered together as a one-cancels-other order, which means that if a confirmed fill is received for either order, the trading system will automatically attempt to cancel the other, without further instructions from the trader. For example, if you determine a market's trading range to be between 50 and 60 and would like to make an appropriate move at support (buy) or resistance (sell), you might place an OCO order to buy one contract just above 50 and sell one just below 60. Both orders will work in the marketplace until one is filled, at which time the system will automatically cancel the other.
Trailing stop: A trailing stop is a special order type that allows the trader to profit from favorable market movement while having the protection of a stop order, without having to constantly monitor the market and repetitively cancel or replace a regular stop. Trailing stops -- sells to protect the downside on a long position, buys to protect a loss on the upside for a short -- adjust as the market moves in the trader's favor.
Alert-triggered order: Rather than inform the trader when a particular price level has been hit, an alert-triggered order will actually execute a preestablished trade at that trigger.

Originally published in the September 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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