TOP FARMER WEEKLY PERSPECTIVE 7/22/2022 BY BRYAN DOHERTY
Why Markets Move
Markets can move for many different reasons. This simple concept of price change is predicated on the idea that when prices move higher, there are more buyers than sellers. That’s when buyers must bid higher to find sellers. The opposite can be said when prices drop. Sellers must lower their asking price to find someone willing to take the opposite side of the trade. In the futures market, for every trade there is a buyer and seller. What is sometimes misunderstood are the different types of buyers or sellers, and how this can influence market movement.
In a market where prices are stable, there may be a little or a lot of trading. Still, the buys and sells are close to equal in price. In essence, canceling each other and leading to little price change. What happens when prices rally? There may be three different types of buying that is occurring.
First, there are buyers who believe prices are destined to go higher and are willing to buy regardless of price. This can put upward pressure on prices. As prices move higher, a second type of buyer is one who is exiting a position (not initiating a position). As an example, a trader believes prices will go lower, so he sells, and willing to risk only a certain amount. Generally, he will then place a buy stop order. Once triggered, the buy stop order buys back at the market price to exit the position. A third type of buying that can occur are from traders who are short the market and don’t use a stop. They watch the market. If losses, margin call, or both occur, they exit by buying back their contracts. The second and third types of buying occurred because prices moved higher, not because the traders necessarily turned bullish. They were buying to exit their positions. This brings us back to the trader who initially bought and, since prices moved higher, may likely buy more while the trade is working in their favor. Human nature suggests if the trade is working and the trend is favorable, one will repeat the process.
The same occurs where prices drop. Risk orders get triggered to sell long contracts. Margin call selling can occur, and traders who are making money will likely add short positions until the market tells them otherwise.
Understanding this concept is fundamental to understanding that markets tend to move faster and further than most expect. This is especially the case when the fundamentals have not changed to warrant a price drop or rally. Often, farmers who are experiencing iffy crop conditions are frustrated when prices drop quickly with little change to the fundamentals. From a marketing perspective, realizing the trend can change quickly and accelerate can help you determine what marketing tools might be best to prepare you in advance of a change. If you are long the product in the field, using a sell stop on futures maybe a good way to hedge against lower prices without having to watch the market. In other words, have a working order in place. If prices drop, you are triggered into a transaction. If prices do not drop to the stop point, you are not a seller.
Talk to a professional before entering into any transaction. Make sure you understand the risks and rewards. Markets can move in your favor quickly, and move against you quickly. Prepare yourself for both scenarios.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.