Market Fundamentals of Supply and Demand

posted in: Fundamental Analysis | 0

Fundamental analysis involves the study of the basic underlying supply and demand factors that can be expected to influence market price. In the grain markets, such information as the size of the corn harvest, what was left from last years crop (referred to as carryover), expected exports, and feed use will all come into play in helping make trading decisions. When a fundamental analyst sees an imbalance in these types of factors they will develop a trading plan accordingly.
It should be noted that demand and supply are not only significant in physical commodities, like the grain markets. They apply to anything that has a price. It is just that data is much more diverse for things such as stocks rather than soybeans.

Market Fundamentals-Supply and Demand Dynamics

Another thing to remember is that in the longer term, supply and demand are not mutually exclusive. They dynamically interact together. An old grain trader adage is “that the best cure for low prices is low prices.” That’s because low prices discourage small profit margin producers to plant, and encourages higher margin users such as livestock producers to raise more cattle.
Consequently all price effects on supply and demand have the most impact on the marginal market producers and users. It is through this dynamic that imbalances adjust themselves.
The table below shows the USDA corn supply and demand report for April, 2012.

supply and demand - fundamental analysis
Corn Supply and Demand

Why We Like Market Fundamentals

From a logical viewpoint there is a certain allure to the idea of trading markets on a fundamental basis. And while there are certainly many excellent traders that have made their fortunes utilizing this method of trading, there are several drawbacks to this approach. To begin, one of the most critical elements of successful trading is cutting losses short. Basically what that means is that you need to know when you are wrong relatively quickly. When using a fundamental approach, the forces of supply and demand are difficult to measure and consequently significant changes are not necessarily easy to detect. As a result, a market can move significantly before the fundamental reason is known. Another drawback is the fact that once fundamental data is released, everyone knows about it. It is often very difficult to come out ahead in the futures markets if you are acting on news that everyone else knows. Due to these limitations even hard-core fundamental traders must use some form of technical analysis to manage risk.

Psychology of Trading

posted in: Trading Psychology | 0

Psychology is the lynch pin of being a successful trader. It is more important than the trading system itself. To be sure, successfully trading markets is a difficult task. Fear and greed are very powerful emotions, and they manifest themselves in this endeavor. The true difficulty lies in the basic “wiring” of our brains. In life, from the results of our actions we learn about being right or wrong. As we experience it as sentient beings, we are rewarded with positive outcomes, and punished by negative ones. To put on a trade, have it go against us and lose money, is a negative experience. psychology of trading financial marketsIn the way that nature teaches us, we are to believe that we were wrong. However, to be a successful trader, one must see that losing money in a position is not really a negative or wrong experience. The results of an individual trade are actually secondary to the objective. In truth, losses are simply a cost of doing business. There is no and never will be a holy grail to trading successfully. No system or method will work 100% of the time, ever!
Successful trading is a mental process. As humans, income and wealth are the life blood of our sustenance and survival. Therefore, as markets move for or against our trading positions, they can have a huge psychological impact on our actions. That is why, in order to be successful traders, we need to overcome the natural emotions of fear and greed.
A trader gains a huge “Edge” over these obstacles when implementing a structured trading plan. A methodological approach provides a platform to operate effectively even under the most difficult and stressful conditions. First, with a structured trading plan, you have guidelines set that can be relied on in even the most stressful market conditions. Second, it provides a venue to analyze what you did right and what you did wrong in any given trade. It also gives you a benchmark for improvement, and the opportunity to adjust your overall trading plan. That in turn builds the confidence necessary to make tough decisions in the time of crisis which the market inevitably provides.