Coffee Futures
Futures trading: Supply and Demand
One of the fundamental concepts of trade is the idea of supply and demand. When demand is high, it "eats" the supply of something, so supply decreases. When demand is low, supply is usually high. This is true if the demand for food or houses or cars or toothpaste teeth or futures contracts. If the demand for a commodity is high, supply is usually low.
Price is closely linked to this concept and tends to rise and fall in a manner that is consistent with demand. When demand increases, prices increase. The reason is that, as an element becomes scarcer, it becomes more expensive. As Unsurprisingly, the price goes up and down in the opposite direction to the offer.
Let's apply this idea to a futures contract: Imagine a futures contract for pineapples. A trader named Bill wants to buy the futures contract. If there are many contracts available, the sellers will each bill trying to buy his contract. Supply Is high and demand is low (only Bill who wants to buy pineapples) for many active sellers drop their price to get Bill to buy pineapples.
Now let's reverse the situation: Say there is a run on the contracts of pineapple and suddenly everyone wants a contract of pineapple, but not enough for everyone. The Demand is high and supply is low, so that means the price is likely to be high. These active buyers each bid the price in the same way that the auction can increase the price a popular item.
While this concept is evident in many markets (including the stock market, bond market, the forex market and futures market) There is an additional factor at play in the futures market that is not present in other markets: As this is derivative investments and the price is based on the value of goods representing the supply and demand in these markets may also affect the price of the futures contract. If there was a drought, for example, that ended with a huge portion of grain, grain demand would be high, but the offer would be low, which means that the price would be high. This can increase the price of the product (And, in turn, the price of the futures contract).
How can a futures trader knows what to do? They have to do two things: First, must closely monitor the markets and the study of environmental conditions of the underlying asset for which they are buying the futures contract. For example, if you're buying coffee futures contract, you should study the growth of coffee beans worldwide, to examine what the weather is like in the coffee growing areas, find out how roasting container, transportation, and distribution companies play a role, and the impact that environmental and economic forces in coffee prices.
Then, must use a robust trading platform for the trading of futures contracts to see how the market is responding to supply and demand of assets underlying.
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(Article by Aaron Hoos).
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