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Futures Trading Systems

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A History of the Futures and Commodities Market:
From Spot Trading to Modern Speculation and the Emergence of Supercycles

  • The beginning of futures and commodities trading in the US can be traced back to 1840s Chicago.
  • While our society has changed substantially, the goal of futures trading has always been the same: claim your price today to avoid losing money tomorrow.
  • The futures and commodities exchange had a major part in making Chicago the city that it is today.
    • The city grew and prospered as the market performed well, and suffered when it was failing.
  • One of the key attractions of futures and commodities trading initially was assuming the risk of an agricultural commodity in the moment without the multitude of extra issues that come with owning an entire agriculture business outright.
  • "Spot" trading began in the late 1840s, when farmers and agricultural sellers wanted to set up locations where you could “spot” buy, sell, and deliver agriculture in volume "on the spot".
  • Eventually, due to transportation speeds at that time, the buyers and sellers began to negotiate pre-determined prices to be paid at pre-determined amounts of time regardless of what the market was doing as far as the product’s value.
    • This evolved into buyers and sellers who had no intention of actually picking up said agriculture at all, but only assuming and selling the risk when they felt it was most profitable.
  • In 1921, the Futures Trading Act was passed, followed one year later by the Grains Futures Act. These were the first government passed acts that imposed taxes on commodities, specifically grains.
    • The Grains Futures Act was unfortunately flawed in its initial conception; when compliance failures arose, the act penalized the entire exchange as a whole, as opposed to the individual non-compliant traders. This deterrent in its foundation made regulation of the markets extremely difficult.
  • In 1933, The Commodity Exchange (COMEX) was created. This was a result of The National Metal Exchange, The Rubber Exchange of New York, The National Raw Silk Exchange, and The New York Hide Exchange all merging together.
  • This merger, along with the growing participation from buyers and sellers not involved in agricultural or commodities production directly, led to entire spaces where risk on commodities and futures could be traded at volume. For example:
    • The Chicago Mercantile Exchange (CME)
    • New York Mercantile Exchange (NYMEX)
    • London Metal Exchange (LME)
    • Australian Stock Exchange (ASE)
    • NYSE Euronext (ASE)
    • Korea Exchange (KRS)
  • In 1936, The Commodities Exchange Act (CEA) was passed. Considered the antecedent of the Grains Futures Act, the CEA was created to specifically regulate the trading of commodities and futures, as there were many loopholes’ traders and brokers were using to unfair advantage.
    • This act would provide the foundation for the eventual introduction of the Commodity Futures and Exchange Commission created in 1974.
    • The CEA has been amended at several points in history, but only to include other commodities not regulated prior (e.g., wool, livestock, stock indices).
  • In the 1970s, The US Government made it legal to trade financial futures, namely the price of currencies. This opened up a whole new side of the market, as before currencies were typically tied to the value of elements such as gold and silver. Removing that tie introduced further possibilities in the evolution of futures trading.
  • In the 1970s, The US Government made it legal to trade financial futures, namely the price of currencies. This opened up a whole new side of the market, as before currencies were typically tied to the value of elements such as gold and silver. Removing that tie introduced further possibilities in the evolution of futures trading.
  • This legalization coincided with the creation of the Commodities and Futures Trading Commission (CFTC) in 1974. This commission was created to enforce the CEA while also promoting a more competitive, profitable futures and commodities market.
  • By the 1980s, the CFTC made it legal to trade futures on stock indices such as the Nasdaq 500, along with various government debt instruments.
  • Even today, agricultural products still dominate the futures and commodity markets.
  • Futures today can often be used to hedge other investments, like stocks and bonds. Sometimes, it is prudent to protect your losses in other investments with solid positions in the futures and commodities market.
  • In the early 1990s, Commodity Index Funds were introduced as tradable contracts on the market. These funds were created for a few reasons:
    • Investors could now benefit directly from the returns in buying commodity contracts.
    • They were developed as a new way to hedge investments and protect them from inflation while simultaneously diversifying portfolios.
    • They are considered a good entry-point for traders to enter the futures market from.
  • However, Commodity Index Funds have also faced much criticism and scrutiny, as they are often credited with rising inflation rates in the US and beyond.
  • In 1999, electronic commodities trading was officially introduced as a viable method of trading.
    • This came shortly after the introduction of the Financial Information Exchange protocol (FIX) in 1992.
    • By 2001, major trading hubs such as the CMEX and CBOT introduced their own FIX-compliant internet trading programs.
    • Gone now were the days of runners carrying contract orders from the brokers to the traders, using the internet as opposed to actual human contact (and error).
    • In 1998, Cannon Trading Company emerged as one of the leading brokerages to implement electronic trading successfully. They still are a leading force in the evolution and successful trading of electronic futures and their derivatives, including E-Minis and E-Futures.
  • In 2002, the futures and commodities market experienced the first recorded supercycle.
    • A supercycle is a sustained price increase in a specific future or commodity
    • This initial supercycle was fueled primarily by China’s massive economic growth during the early 2000s.
    • The rapid growth and subsequent spike in spending caused massive demand for commodities, and the producers were often overwhelmed by the sudden, immediate demand for new product.
      • In demand product included:
        • Iron
        • Aluminum
        • Copper
        • Crude oil
        • Coal
        • Natural Gas
  • In 2011, the demand finally subsided, as supply fully caught up.
  • Supercycles have been determined to last anywhere from 10 – 35 years, although it is unclear when the next supercycle will likely begin, and what commodities and products it may affect either positively or negatively.
  • Some possibilities include
    • Climate change
      • Coal and Natural Gas will go down in value as they contribute to the problems directly effecting climate change.
    • Energy Development
      • Solar and wind power are becoming widely popular sources of renewable energy.
      • Because of this, many predictions foresee copper and steel rising in price, as they are major elements in the construction of solar paneling and wind silos.
      • The emergence of fully-electric automobiles is also predicted to drive up the prices of elements used in the creation of electric batteries, specifically
        • Cobalt
        • Lithium
        • Nickel
        • Graphite
        • Manganese
  • Cannon Trading Company, established in 1988, has long been considered one of the foremost authorities and top trading brokerages for futures and commodities in the futures market. After capitalizing strongly on the 1997 move to electronic trading, they have been providing access to nearly every major futures and commodities trading platform available, making strong, cutting-edge contributions to futures traders.
  • To speak with one of our professional brokers, please either call 1(800)-454-9572 or fill out our broker’s form here and a broker will be in contact with you within 24 hours.
*DISCLAIMER: Futures trading is very risky and not for everyone.
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E-Futures Sierra Charts Firetip (Mac Compatible) RTrader

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