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Futures contracts for commodities like cocoa, sugar, coffee, cotton and orange are often regarded as soft market futures. They provide opportunities to both hedgers and speculators to profit from changing commodity prices. Soft market futures are traded in different exchanges across the world, but the trading volume is less compared to currency, index and energy futures.

Like all other futures contracts, soft market futures are standardized contracts for quality and quantity. They are easy to short sell. Soft market futures contract specifications of NYBOT (New York Board of Trade) is as follows.

• Cocoa : Futures contract size is 10 metric tons. Minimum tick size is $10 per contract. Delivery months are March, May, July, Sep and Dec.
• Sugar : One of the heavily traded commodities in terms of total volume. Contract size is 112,000 pounds. Minimum tick size $11.20 per contract. Delivery months are March, May, July and Oct.
• Coffee : One of the most volatile soft market commodities. Contract size 37,000 pounds. Minimum tick size $18.75 per contract. Delivery months are March, May, July, Sep and Dec.
• Cotton : Contract size is 50,000 pounds. Minimum tick size is $5 per contract (if cotton exceeds $0.95 per pound, then minimum tick size becomes $25 per contract). Delivery months are March, May, July, Oct and Dec.
• Frozen concentrated orange juice : Contract size is 15,000 pounds. Minimum tick size $7.50 per contract. Actively traded in March, May, July, Sep and Dec.

Remember most futures exchanges do not offer electronic trading of contracts for soft market commodities. And also as the trading volume is less, there is always change of high price volatility and/or price stagnancy.

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Average Directional Index (ADX) is a popular indicator used by traders to resolve the strength of a prevailing trend of a trading instrument and to confirm trading signals. It was developed by J. Welles Wilder. The ADX indicator does not differentiate bullish and bearish trends, it only tells about the trend strength or is there any trend.



Average direction index is a simple to understand indicator with values 0 to 100. It is usually calculated based on last trading price of last 14 trading days. Values below 20 indicate weak trends or sidewise market movements, values above 40 indicate strong trends and values above 60 indicate extreme trends but are very rare. Average direction index is not used for generating buy/sell signals. Most traders use ADX only in conjunction with other trend indicators and technical analysis tools to confirm the existing trend.

Average direction index itself is derived from two other indicators – Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI). Positive DI measures the upward movement strength and negative DI measures the downward movement strength for a time period. Many trading systems plot these two with ADX. These two indicators are used by many systems to generate buy and sell signals.

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Uptick or Plus Tick rule was a rule imposed by Securities and Exchange Commission (SEC) on short sellers. This rule necessitates traders to enter short sell orders only at a price higher than previous trade price or in an uptick. Short sale uptick rule was introduced in 1934 and was withdrawn on July 6, 2007.

The idea behind short sale uptick rule was to prevent sharp declining of the price of an instrument by preventing short-sellers from adding momentum to an already declaiming instrument. The effectiveness of this rule was always under contradiction; where opponents saying there is no evidence that short selling on uptick slowed up the speed of declining instrument. And the supporters of the rule saying elimination of uptick rule may result in increased volatility in price of less traded instruments.

Short sale uptick rule was not applicable for trading all financial instruments. It was there for most stocks and funds. The rule was not applicable for some highly liquid trading instruments like currencies, some ETFs, Futures and SSFs (Single Stock Futures). Traders can trade these instruments at a downtick and/or at zero tick.

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Open interest is one of the most popular indicators for identifying and confirming trends. It is also known as Open Commitments and Open Orders. Open interest is widely used by futures and option traders; it can also be applied to stock trading.

Open interest is the total number of outstanding derivatives contracts at one point of time. In other way, it is the total number of futures and options contracts which are not expired, exercised or settled by delivering underlying instrument. In stock market, it is the number of buy orders on market opening. Open interest of a one day is disclosed by markets at the end of the trading day as a comparison of previous days open interest; it can take both positive and negative values. Many traders mistake open interest with volume of trade; open interest only includes open positions where as trading volume include both open and closed positions of a trading day.

Open interest is a powerful yet simple trend indicator when used in conjunction with price and volume indicators. In general, rise in price and open interest indicate an upward trend, while fall in both indicate market consolidation. Rise in price and fall in open interest indicate weakening of an upward trend. Fall in price and rise in open interest indicate a weak market. Sudden rise or fall in open interest usually indicates volatility increase in near-future.

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The Week Ahead: The combination of the big drop in the price of oil and Fed chairman Bernanke's soothing words that inflation would moderate with no need to raise interest rates sparked a week end rebound in stocks. Watch for existing homes sales numbers on Monday, new home sales figures and the Case Shiller Home Price Index on Tuesday, durable goods numbers on Wednesday, the preliminary 2nd quarter GDP release on Thursday, and finally the personal income and spending numbers as well as the University of Michigan Consumer Sentiment Index on Friday.

Stocks to Watch: The oil price drop sparked rallies in the airline sector with the stocks of AMR, CAL, UAUA, and LCC participating, but all are well above there July lows. Toro Co. (TTC) came in above earnings estimates for their 3rd quarter surging the stock off of a recent low. Pacific Sunwear (PSUN) came in light on their 2nd quarter earnings as same store sales fell 1% and gave a cautious view on the second half of 08'. Takeover speculation seems to have sparked shares of Akamai Technologies (AKAM) but nothing specific came out.

Special Note: A favorable psychological environment appears to be developing in the minds of investors as the value of the dollar strengthens with the sharp break in the price of oil. With interest rates on hold for the foreseeable future, stock speculation may boost the major indexes higher before the summer ends. Caution, however, is still warranted with so many financial related companies such as Fannie Mae and Freddie Mac on the skids while others continue to find new losses on their balance sheets.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Backwardation and Contango are two popular futures trading terms which are just opposite to one another. Both are theories regarding the futures contact price and expiration rate.

Backwardation is the situation where the future contract price is lower than the spot price for a commodity. As the futures contract approaches maturity, it will trade at higher and higher prices to finally meet the future spot price. Backwardation is evident when underlying commodity is perishable and/or is a software commodity. It is characterized by a downward slopping futures curved, which is referred as ‘backwardated’. John Maynard called backwardation in futures market by term “normal backwardation”, believing backwardation is a natural phenomenon; not a random one.

Contango is the situation where the future contract price is higher than the spot price for a commodity. So, as the futures contract approaches maturity, it will trade at lower and lower prices to finally meet the future spot price. Contango pattern is evident when the underlying commodity is non-perishable and has a cost-of-carry such as financing costs, storage costs and insurance costs. One good example is the gold futures. Contango is characterized by an upward slopping futures curve, which is referred as ‘in contango’ or ‘contangoed’.

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Bullish homing pigeon is a candlestick trend indicator which marks the end of a downward trend and start of an upward trend. It is a candlestick patter in which a long black (or colored) candlestick is followed by a short black candlestick in a way that the second (daughter) candlestick is located within the rage of first (mother) candlestick.

Bullish homing pigeon patterns look like bullish harami, but here both candlesticks are black in color meaning their closing prices are lower than opening prices. The opening and closing prices of second trading day must be higher than the closing price of first trading day. The lengthy and worst is the downtrend, the more significant is the homing pigeon. Similarly the short the daughter candlestick and the higher its position is, the better its reliability.

Bullish homing pigeon patterns favor most swing traders trading stocks and currencies. It indicates traders to take long positions and to exit existing short positions. But homing pigeons are not considered among most reliable trend indicators, so most traders wait till next day before making a move. The reliability of bullish homing pigeons also increases when they are used in conjunction with other reliable trend indicators.

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The Week Ahead: The recent rise in the value of the dollar could mean lower commodity prices and inflation and thus better prospects for profit margins. Technology related stocks are receiving the greater benefit as measured by the Nasdaq's relative performance. Reports to watch are the NAHB housing index on Monday, housing starts and the PPI on Tuesday, oil and gas inventories on Wednesday, and jobless claims along with the leading economic indicators for July on Thursday.

Stocks to Watch: Berkshire Hathaway raised its stake in NRG Energy (NRG) buying 3.3 million shares in the Texas power producer. SunPower Corp. (SPWR) reached a multi month high after receiving a big deal to supply solar power to PG&E Corp. which helped propel the whole solar sector. Autodesk (ADSK) nearly reached its 200 day moving average after beating 2Q earnings estimates and a brokerage upgrade. Lifeway Foods (LWAY) was downgraded after missing 2Q estimates while Orient Express Hotels (OEH) was upgraded by Merrill Lynch.

Special Note: From the July 15 low the three majors DJIA, S&P 500, and Nasdaq are four weeks into there recent uptrend. This summer rally could extend to the Labor Day holiday but appears to need a rest near term as some stochastic measures are rolling over. One area of resistance to watch is if the S&P 500 closes above its 200 week moving average at approximately 1325. This may signal the beginning of more aggressive short selling as the market transitions from bullish behavior to bearish continuing the trend of lower lows.

Commentary provided by Barry Ward, Registered Principal, NobleTrading.com, Inc.

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Generally inflation is characterized by increasing commodity and service prices, decreasing total portfolio value and weakening national currency. One can follow different strategies to overcome inflation. Some of those strategies to fighting high inflation rates are noted here.

• Paying back high-cost loans - When inflation is high no investing option can guarantee greater return than loan interest payment. So prepaying loans (especially floating rate loans) is the better option.
• Avoiding purchases based on loans.
• Avoid large savings bank account balances and avoid keeping large amount of idle money in hand.
• Creating an emergency fund – Living and healthcare expenses are pretty high in inflation. Make sure that your emergency fund covers at least 3 months of your expenses. Investing in short-term debt funds is a good option.
• Diversifying investments – Investing in emerging and well performing international economies is a good option. Investing in gold and similar precious metals is one another option.
• Investing in stocks with long-term profit goals – There are stocks of many companies which are least affected by high inflation or even benefited by it. Also stock prices can be at their bottoms. Avoid stocks which are sensitive to interest-rate changes.
• Go for capital gains and dividends – tax rates can be higher and interest incomes are taxed more. Long-term capital gains and dividends are taxed less or not taxed at all.

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Many times countries across the world implement a combination of fixed and floating exchange rate for their currencies. Click here for introduction to currency exchange rates. Central banks of nations do this to overcome economic crisis or to meet certain requirements. Both dual and multiple currency exchange rates are not advocated for growing economies.

Dual currency exchange rate involves applying fixed exchange rate for certain market segments, like importers and exporters and keeping other segments floating. By this way government can regulate inflation rates and essential commodity prices while keeping the foreign reserves undamaged. Multiple currency exchange rates involve applying different (both fixed and floating) exchange rates to different market segments. Usually essential market segments have favored exchange rates to ensure their growths and non-essential and luxury market segments have less favored (or discouraging) exchange rates.

Generally applying multiple currency exchange rates to market segments produces the same effect of applying different tariffs and taxes to these segments. Most governments employ dual and multiple exchange rate systems for a short-term to quick-fix economic problems. If the problem continues tariff and tax rates are implemented directly. Most times, implementing long-term multiple rates negatively affect a nations industries and results in corruptions. Often many retail forex traders avoid currencies of nations with dual and multiple exchange rates.

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Prices of agricultural commodities like wheat, oats, rice, soybeans and corn rise and fall with news, weather, and local and international economic changes. Grain futures contracts are a good way of profiting from this ever changing grain prices. Grain futures are widely traded in different markets of the world by both hedgers and speculators.

Grain futures contracts offer all the benefit of futures such as standardized contracts for quantity and quality, trading on leverage money, easiness to go long and short, and hedging against risk. Grain futures market is fairly liquid with comparatively less volatility, and low margin trading requirements. Grains futures aren’t very big contracts; their total dollar amount is considerably less than most energy and equity futures.

The contract specifications of some of the most traded grain futures in CBOT are listed below.

• Corns: Most traded grain futures in terms of volume. Contract size is 5,000 bushels (around 127 metric tons). Minimum tick size $0.0025 or $12.50 per contract. Maximum daily price movement $0.20 per bushel. Actively traded in March, May, July, Sep and Dec.
• Wheat: One of the most volatile grains. Contract size 5,000 bushels, minimum tick size $0.0025 or $12.50 per contract. Max daily price movement limit $0.30. Actively traded in March, May, July, Sep and Dec.
• Soybeans: Most volatile grain and most popular oilseed. Contract size 5,000 bushels, tick size $0.0001 or $6 per contract. Maximum daily price limit $0.50 and actively traded in March, May, July, Aug, Sep, Oct and Dec.
• Oats: Oats have low daily trading volume. Contract size 5,000 bushels, tick size $0.0025, maximum daily price limit $0.20, and actively traded in March, May, July, Sep and Dec.

There can be position limitations imposed by markets which may differ with gains and for hedgers and speculators.

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Harami is a candlestick indicator which marks the reversal or sidewise movement of an existing trend. The Japanese word Harami means pregnant, and the indicator is sometime known as pregnant candle. Harami candles are found on daily charts and can be found both at the end of bullish and bearish trends. They are easy to identify and mostly favor swing traders trading stocks and forex currencies.


Bearish Harami candle indicates the end of an uptrend. It forms when a smaller candlestick is located within the range of previous day’s large candlestick in a bullish trend. The smaller the second (daughter) candlestick, the more is the probability of a trend reversal. Also the bearish harami indicator is more reliable when the first (mother) candlestick is white (bullish) and the daughter candlestick is black (bearish).

Bullish harami candle indicates the end of a downtrend. It forms when a smaller candlestick is located within the range of previous day’s large candlestick in a bearish trend. The smaller the daughter candlestick the more is the probability of a trend reversal. Bullish harami indicator is more powerful when the large mother candlestick is black (bearish) and daughter candlestick is white (bullish). Many traders take this as a good opportunity to buy stocks.

Harami candlesticks are not considered among most reliable indicators. But they are useful trend indicators when used in conjunction with other trend confirming tools.

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Increasing inflation usually denotes slowing of economy as prices for food, commodities and services rise and the currency weakens. Some of the most prominent effects of inflation are noted here.

• Increase in costs – you have to pay more for edible products, energy commodities, transports, etc. This price increasing effect will be significant for imported goods like oil and gas.
• Loans becoming costlier – most loan rates will go up, so you have to pay more for your vehicle and home loans.
• Decrease in returns from investments – When adjusted for inflation, fixed bank deposits and mutual fund returns yield low returns (or even negative returns). This mainly negatively affects persons who seek monthly returns from their investments.
• Decrease in total portfolio value – Increasing inflation rates negatively affects stocks, as it challenges growth of companies. The result is the decrease in total portfolio value.
• High taxes – governments may impose higher taxes for keeping the money flow or to support weaker parts of the economy.
• Cut down in working costs by companies – To ensure survival or progress of ongoing projects, companies may reduce their working costs. Results include fewer allowances and annuities, and drop in parties and travels.
• Slow infrastructure growth – Governments, companies and persons can postpone or stop infrastructure development projects.

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Currency Exchange Traded Funds (ETFs) are trading instruments to profit from the most liquid market of this planet. There are many advantages of trading Currency ETFs over currencies and stocks.

• Simplicity in trading: Currency ETFs are traded just like stocks. You can buy, hold and sell ETF shares though a broker.
• Diversification of trading portfolio.
• Easiness of putting money in growing work economies.
• Tax savings: ETFs are more tax efficient than stocks; usually traders taxed only when they initiate a trade.
• Hedging against declining dollar rates.
• Liquidity: Currency ETFs are more liquid than stocks.
• Trading transparency. One can easily analyze his portfolio value as currency ETFs daily discloses the exact holdings of funds.
• Flexibility of stocks: One can short his position, can trade and hold on margin, can place limit orders, and can follow a range of trading strategies.

But with any trading instruments there are also risks. Global and national economic changes, government rules and political problems can cause drop in foreign currency rates that the ETF is holding. Strengthening of dollar can also cause loses. And timing of entering and existing trades is also very important.

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Public Short Ratio (PSR) or Non-member Short Ratio is a market sentiment indicator used by traders to find trading opportunities. PSR shows the relationship between number of public (retail) short sells and number of total short sells for a given period.


The basic assumption behind Public short ratio is that public (or retail traders) are poor short sellers compared to institutional and stock-exchange member short sellers. So going against public can create opportunities. Although this assumption is not always true, historic statistics shows that this strategy has a high percentage of success. PSR offer better results when it is used in conjunction with other technical analysis tools and indicators.

Public short ratio is a simple market indicator, which is easy to interpret. PSR is usually represented as a line of 10 day moving average of the closing price of PSR. If the PSR moving average is above 25%, then the public sentiment is bearish and if PSR moving average is below 25%, then public sentiment is bullish. The more the time PSR stays on a particular trend, the more the chance of a trend change. Likely the more the PSR move from 25% range, the more the chance of a market retracement.

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If traded properly Single Stock Futures or SSFs are good trading instruments. They are an easy way to own underlying stocks and also give the freedom to easily go short or long and to hedge against risks. Single stock futures are traded in 2 US markets, OneChicago market and Nasdaq Liffe markets.

Single stock futures contracts are standardized contracts having 100 shares of underlying stock with a tick size of $1 and a predefined expiration date. SSF market is liquid and contact prices are always changing with the change in underlying company stock prices. Usually the margin requirement is 20%, but it can differ with brokers. Remember the margin requirement for a position is calculated each day by brokers with changing price of the contact for both buyers and sellers.

With single stock futures, traders can easily take long and short positions. Trading on margin magnify both profit and loss. For example a trader takes a long position for an SSF contract of XYZ stock trading at $10 with just $200 (20% margin). If he offset the position when XYZ is at $13, he will gain $300, which is 150% of the initial deposit; on the other hand if XYZ is at $7, he will suffer a loss of $300, again 150% of the initial deposit. Many traders, who want to keep the position for long-term, usually hedge against loss by taking an opposite position at a desired time to offset the effect of initial position.

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Diamond top formation, also known as bearish diamond and diamond reversal, is a technical analysis pattern, which indicates the reversal of a bullish pattern. Although Diamond top formations are created so often, they are reliable and powerful indicators whenever they are created. Bearish diamonds are quite extensively found in forex market because of its high liquidity.

Diamond top formations usually occur at the top of an uptrend and their shape resembles a diamond shape. Many traders misunderstand this shape with head-and-shoulder formation, but in bearish diamond formation there will be high trading volume than head-and-shoulders. A typical diamond is formed because of broadening and then consolidating of a price pattern. Trading volume usually decreases when the pattern consolidates in the second half. Trend lines are plotted connecting top and bottom prices to starting and ending points. Many traders interpret these trend lines as resistance (top lines) and support levels (bottom lines).

Volume associated with diamond top formation indicates the reliability of the pattern; if volume increases, reliability increases. Price targets are set by subtracting top and bottom distance of the pattern from entry point. Many traders also place stop-loss orders close to support levels. The duration of the formation is also an important indicator.

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Constant-Weighting asset allocation strategy is a moderately active portfolio management strategy. The strategy includes readjustment of portfolio in accordance with performance of assets. For profiting most from this strategy, persons or portfolio managers should always be in touch with economic changes and news.

Like strategic asset allocation, constant-weighting asset allocation strategy has a ‘base policy mix’, which is the proportion of portfolio to be allocated for each asset class like stocks, bonds, funds, real-estate, etc. Those who follow constant-weighting strategy buy-and-hold assets according to the initial base policy mix; but they frequently rebalance their portfolio with respect to the performance (or price) of the asset. For example the declining of stock value would tempt them to buy more stocks and the increasing of stock value would tempt them to sell the stocks they holding. After exploring opportunities, portfolio is then readjusted to the original base policy mix.

Market research and timing are important with constant-weighting asset allocation strategy. Although not a strict rule, most followers of this strategy returns to base policy when any asset class increase/decrease above 5% of initial value. Advantages of constant-weighting asset allocation strategy include predictable income and risk, better utilization of opportunities and portfolio diversification. Downsides include need of trading/investing experiences, need of evaluating tools and constant monitoring of asset classes.

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Currency Exchange Traded Funds or Currency ETFs are one of the latest investment/trading instruments available to profit from the price changes of forex market. Currency ETF are a variation of traditional ETFs, in which the ETF firm buys and holds foreign currencies in a fund and the shares are made available in market for investors/traders.

When the foreign currency, which constitute the fund, rises against US dollar (USD) the whole value of the fund also rises correspondingly, so should the ETF share price. If the foreign currency falls against USD, the value of ETF falls, and so should be its share price.
There are many types of currency ETFs.

1. Currency ETFs which track single currencies like CurrencyShares Swiss Franc Trust (FXF), CurrencyShares Euro Trust (FXE), CurrencyShares Japanese Yen Trust (FXY), British Pound Trust (FXB), Canadian Dollar Trust (FXC) and Australian Dollar Trust (FXB). Each share of a currency ETF represents a fixed amount of foreign currency. Eg: share of FXE = 100 Euro.
2. Currency ETFs which track a range of different currencies. Examples include PowerShares DB U.S. Dollar Bullish (UUP) and PowerShares DB U.S. Dollar Bearish (UDN) which track EUR, JPY, GBP, CAD, CHF and SEK against USD.
3. Currency ETFs which track some currency indexes. Like DB G10 Currency Harvest Fund (DBV) which tracks Deutsche Bank G10 Currency Future Harvest Index.

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Market not held orders are market orders placed by traders which allow the floor trader or broker to execute the order at his desired price and time. Market not held orders are practiced widely in international equities trading and commodity trading. They give the brokers the discretion to take appropriate decisions, and they are ‘Not Held’ responsible for the result of their decisions.

Market not held orders are practiced by traders 1) when they are very confident about their brokers, 2) when they lack adequate market and price evaluating tools, 3) when the prices are expected to rise, and 4) when they place large-sized orders. Although the basic idea is to get best possible execution utilizing the broker’s knowledge, market on held orders does not guarantee any profits.

Most brokers and floor traders execute market not held orders manually rather than electronically to get the best desired price. So the process can take time. Often most brokers hold the orders unexecuted when the price if falling. Market not held orders favors beginner traders who face dilemma in taking good decisions and who lack the knowledge of evaluating results and doing technical analysis. They are not so favorable to experienced traders having access to market data and technical analysis tools and who quickly respond to market changes.

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Commodity Trading Advisors or CTAs are persons or firms which profit by handling managed futures accounts from their clients’ behalf or by providing advice on trading. They must be registered with Commodity Futures Trading Commission; registration is done through NFA (National Futures Association). CTAs differ considerably with the markets they are trading, their trading style, trading strategies, experience levels and account specifications.

One clear classification of Commodity Trading Advisors is based on trading style.

1. Discretionary CTAs, who make trading decisions based on their trading abilities and fundamental and technical analyses.
2. Systematic CTAs, who use sophisticated trading systems to generate trading signals.

Different CTAs follow different trading strategies to profit from bullish, bearish and sidewise markets on both long-term and short-term basis. Some major strategies include trend following strategies, counter trend strategies, arbitrage strategies, fundamental trading strategies, option writing or selling etc. Many CTAs trade one or two futures markets like agricultural commodities or energy commodities, while others believe on diversification. The account minimum requirements also vary considerably.

Things to consider when choosing a Commodity Trading Advisor for managed futures trading include their trading experience, products traded, past performance and minimum account requirements.

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