Future Market

 What is Futures Market? 

The Futures Market is a centralized marketplace for buyers and sellers from around the world who meet and enter into futures contracts. Pricing can be based on an open cry system, or bids and offers can be matched electronically. The futures contract will state the price that will be paid and the date of delivery. 

Basics of Future Market- 

• A commodity futures contract is an agreement to buy or sell a particular commodity at a future date

• The price and the amount of the commodity are fixed at the time of the agreement

• Most contracts contemplate that the agreement will be fulfilled by actual delivery of the commodity

• Some contracts allow cash  and Trade Settlement in lieu of delivery 

Typical Users of the Futures Markets - 

• Most participants in the futures markets are commercial or institutional commodities producers or consumers

• Most participants are “Hedgers” who trade futures to maximize the value of their assets, and to reduce the risk of financial losses from price changes

• Other participants are “Speculators” who intends to profit from price changes in futures contracts

Example of Future Contracts

Suppose, we decide to subscribe to cable Internet. As the buyer, we enter into an agreement with the cable company to receive a particular plan of cable internet at a certain price every month for the next year. This contract made with the cable company is similar to a futures contract, in that you have agreed to receive a product at a future date, with the price and terms for delivery already set. We have secured your price for now and the next year - even if the price of cable internet plan rises during that time. By entering into this agreement with the cable company, we have reduced your risk of higher prices. 

Significance of the Futures Market 

Futures Market have a great significance on the economy of a nation like - 

• Price Discovery - Due to its highly competitive nature, the futures market has become an important economic tool to determine prices based on today's and tomorrow's estimated amount of supply and demand. Factors such as weather, war, debt default, refugee displacement, and deforestation can all have a major effect on supply and demand and, as a result, the present and future price of a commodity. 

• Risk Reduction - Futures markets are also a place for people to reduce risk when making purchases. Risks are reduced because the price is pre-set, therefore letting participants know how much they will need to buy or sell. This helps reduce the ultimate cost to the retail buyer because with less risk there is less of a chance that manufacturers will jack up prices to make up for profit losses in the cash market. 

Conclusion

The Futures Markets on which they are based have a great effect on economies around the world. Changes in commodity prices can affect entire segments of an economy, and these changes can in turn spur political action (in the form of subsidies, tax changes, or other policy shifts) and social action (in the form of substitution, innovation, or other supply-and-demand activity). So, Future Markets is very significant.

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Market Breadth

What is Market breadth? 

Market breadth is a ratio that compares the total number of rising stocks to the total number of falling stocks.

How it works/Example? 

Market breadth, or stock-market breadth, is used in technical analysis to measure the general direction of the stock market based on all traded stocks. Market breadth divides the number of stocks that have experienced gains by the number of stocks that have experienced losses.

• A ratio greater than one (Market Breadth > 1) indicates overall stock market gains or a bullish sentiment. 

• By contrast, ratios less than one (Market Breadth < 1) indicate overall losses or a bearish sentiment.

Example of Market Breadth


For example, suppose that on a given business day, 1,500 stocks experience gains and 1,300 stocks experience losses. The market breadth for that day would be expressed as follows:

1500 Rising Stocks/1300 Falling Stocks = 1.153

With a market breadth of 1.153, the stock market would be said to have experienced overall gains.

Significance of Market Breadth

Market Breadth tells you immediately the strength and direction of a move in the market. A market in which more stocks are going up compared to going down and more stocks making new high compared to new low is a good bull market. Extreme Breadth is often indicator of exhaustion and such zones lead to reversal. Tops and bottoms are also formed due to breadth divergence. If a move keeps going up but breadth does not increase then that is divergence. Such divergences typically result in failure of the move.

Market depth

What is Market Depth? 

• Market depth lists all buy and sell orders in the market for a particular security. It is measured in the ability to support relatively large market orders without much affecting the price of the security. 

• The market depth is split into those wanting to buy and those wanting to sell. It’s then further broken down into the prices that those buyers and sellers are willing to buy or sell at. 

Significance of Market Depth - 

• Both traders and investors look at market depth to examine the different prices and volumes (bid and ask volumes) of orders accumulating below and above the market bid and ask prices. Securities with good depth will be relatively liquid, and large orders will not affect price significantly.

• On the other hand, securities with poor depth are more likely to have their price affected by large orders to buy and sell.

• Market Depth provides traders with a measure of the number of pending buy and sell orders for a currency pairing at a range of different market prices. 

• Depth of Market provides traders with information regarding of the amount of liquidity available at different market prices. The larger the volume of buy and sell orders at each price, the greater depth the market is said to have. Depth of Market is often referred to as the order book, due to the fact Depth of Market data shows the current pending orders for a currency or security. Depth of Market data is usually available from exchange for a fixed fee; however those trading Forex may be able to make use of Tier II Depth of Market data straight from their brokerage.

Uses of Market Depth Data - 

• Scalping: Some traders who use scalping strategies use Depth of Market data to help them determine when they should enter in and out of positions. Depth of Market data is particularly useful to those who scalp as technical indicators and candlestick charts tend to be less reliable over shorter time frames. Very few traders base their short term trading decisions solely on Depth Market data, and instead use depth of market data alongside technical analysis and other trading tools. 

• Feel out the Market: Seeing Market Depth allows the trader to see order flow from the brokerages perspective, which offers traders with a unique look at the markets directional bias. Traders can keep an eye on order flow and begin to get a general feel of where the market might be headed.

• Large Volume Traders: Depth of Market data is also useful for those who are trading larger volume as it allows them to see how much liquidity there is at each price level. VWAP (Volume Weighted Average Price) depth of market functionality is particularly useful for those who are placing very large trades as it allows them to see expected entry price instead of the quoted spot price. The majority of retail traders will find enough liquidity for their needs at every price level, but being able to see liquidity levels is still useful.

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