Futures trading systems are based on the analysis of commodity markets. Commodities are traded on regulated exchanges, and futures contracts are the means by which they are traded. Different types of futures trading systems attempt to capitalize on market conditions. Trading systems are developed to provide the investor an edge over other market participants. The major categories of futures trading systems are long term, short term, and day trading.
Most futures traders are speculators and most futures trading systems are designed to speculate on the price performance of an underlying asset. Technical and fundamental analysis of commodities lead to futures trading systems. Technical systems can be based on chart patterns and indicators. Fundamental systems might be related to seasonality, weather conditions, and issues of supply and demand.
Day trading systems are usually based on technical analysis. This form of analysis results in systems developed to capitalize on the intraday price swings of heavily traded futures contracts. Major indexes are often traded using indicators such as moving averages, Fibonacci retracements and chart studies. Day traders use charts and price ladders with time frames as small as one tick.
Long-term investors generally use futures trading systems based on fundamental analysis. This form of analysis might include certain reports that are published weekly. Commercial and large speculator positions are reported and can be charted. This information can be a useful tool for the investor interested in following the "big money".
Many professional traders use a system called futures spread trading. This type of system involves trading one futures contract against another. Spread trades are subject to less volatility than outright futures trades. Reduced margin rates are provided because of the reduced risk of spread trading. Intra-market spreads involve the trading of the same commodity in different contract months. Spread trading frequently makes use of seasonal analysis.
Natural supply and demand cycles for commodities are traded as seasonal trades. Historical prices of commodities are tracked and charted, providing a seasonal method for determining supply and demand. Although past performance is not always indicative of future results, seasonal analysis proves to be correct a majority of the time. Heating oil is a good example of a seasonal trade. Demand for heating oil is obviously greater during winter months.
Long-term traders might use weather reports and conditions when trading agricultural commodities. The annual corn crop might be affected by drought conditions. This could result in a diminished supply of corn, which would tend to increase prices for the available supply. This in turn might increase cattle prices, because feed prices will increase. Many commodity markets are interrelated.
Other types of futures trading systems might include algorithmic trading also known as automated trading. High-speed program trading is frequently used by very large traders such as investment banks and hedge funds. Computer programs might enter thousands of trades profiting pennies per trade. It is claimed that this type of trading adds liquidity to the markets.
Futures trading systems can be rented, purchased or supplied by futures brokers. One should always research the track record of a system before investing capital. Paper trading is recommended. The best trading system is the one researched and developed by the individual investor. There is no substitute for "hands on" research, development and testing of a trading system.