The futures market is fascinating but confusing, and people who are deeply involved in it always want to explore its essence to obtain an eternal profit secret. Different people, in different environments, with different experiences and restrictions, observing and exploring the futures market from different angles, the resulting sentiments or so-called "conclusions" are often very different, as well as the resulting trading patterns that they think are profitable. The wealth of the futures market, which seems to be easily accessible, makes us eager to do so, even if we can't help it, it can't hinder our desire to chase it.
The vulgar like me is one of them. I want to explore the nature of futures from my own perspective so that I can find a profit model in this market that can convince myself.
I think from the perspective of a profit-oriented trader, the nature of futures can be interpreted in two ways:
1. Futures are derivatives of the spot;
2. Futures are a game of human nature.
(If you stand in the market's observer perspective, designer's perspective, operator's perspective or other angles, the nature of futures can have other meanings)
First of all, futures are not born without reason. Every futures variety and futures contract are specific spots. Futures are born for the spot. Although the relationship between futures and spot is sometimes tight and sometimes loose, and occasionally runs in opposite directions. In any case, futures are the derivative of the spot. Futures and spot are inextricably linked. This relationship is inseparable, necessary existence and there is a way to follow. From this perspective, if the research reveals the spot of a certain variety, it will be relatively smooth to make money in the futures market.
Secondly, every volatility, every price, and every transaction of futures is produced by “man-made”. It is made up of a wide and democratic vote by different funds with different opinions. Behind every of these “man-made” products, there is the impact and compromise of power, opinion, emotion, and mind from people. It is the process and result of humanity game between different participants in the futures market. From this perspective, if we deeply analyze the characteristics of human nature and understand the common law of human nature, we can make money relatively smoothly in the futures market.
Because I understand the nature of futures is the derivation of the spot, the game of human nature. Therefore, from my perspective, the fluctuations in futures prices, the formation of trends, the sawing and transformation of the market, etc., which I have seen, can be understood as the process and result of the change of the relationship between the supply and demand of the spot and the game of the participants. Although the price of futures is affected by these two all the time, I can also simply define the main determining power of futures long-term price fluctuation as the supply and demand relationship of the spot; and determining power of futures short-term price fluctuation is defined as the game of participants' humanity. As a result, perhaps my futures trading becomes relatively simple and operational.
Regardless of whether the following two sentences are correct or not, whether they can withstand the rigorous test, but at the current stage with many limits, I can firmly believe that the law of supply and demand determining the long-term price trend is unchanged, and the law of human nature determining the short-term price movements has remained unchanged. With such a belief, it is equivalent to having a core world view and values that look at the futures market. From then on, a corresponding methodology can be derived, that is, looking for the profit model of futures trading under the guidance of this core viewpoint.
The market for a futures product being in a bull market or a bear market is determined by its spot supply and demand relationship. The bull market is in short supply. The bear market is in oversupply. If the spot of the futures product is a commodity, the understanding of supply and demand is easy, and if the spot of the futures product is a stock index or a stock, the relationship between supply and demand is actually the supply and demand of stock chips and money. If there is more supply of chips and less money to buy chips, it’s oversupplied and the stock will fall. Otherwise it will go up.
The bull market and the bear market, that is, the running direction of the market, is determined by the relationship between supply and demand. The waves in the bull market and the bear market, that is, the walking path of the market is determined by human characteristics.
For example, it’s said that " the fighting spirit is aroused by the first roll of drums, depleted by the second and exhausted by the third. " is a characteristic of human nature, so there will always be a "stop" for each trend.
If we are careful enough to observe, understand, analyze, and identify, we will find that when the mainstream people involved in the market are impulsive, panic, chasing, stucking, closing... the market will show corresponding price fluctuations. Any thoughts and emotions of any participant in the market will be reflected in the fluctuations of the market, but when the mainstream people do not form the same or similar views or states, the market is usually in disorder, random, and oscillating. And in a certain time, when the mainstream people's views or status tend to be the same, the market usually has an identifiable trend.
For all investors, understanding the macro fundamentals of supply and demand, such as monetary easing, industrial policies, etc., can be achieved by everyone; but to understand the details of the supply and demand, such as the cultivation area, growth, and alternatives of agricultural products, mood of growers, etc., it’s difficult to achieve by ordinary individual investors but relatively easier for institutional investors and professional investors. Therefore, in the macro fundamental research, the individual investors are not worse than institutional investors and professional investors, but in the short-term trend of fundamental research, individual investors are clearly at a disadvantage. The fundamental analysis of the relationship between supply and demand is definite useful. As for the application of rug analysis or detailed analysis, it depends on person. We should play our strengths instead of relying on our shortcomings.
When the trader observes the market, if he believes that certain types of market fluctuations are not obvious, then these quotes are unavailable to him. For him, he should actively "miss" these quotes; if other types of market volatility are obvious and identifiable, then he can seize these quotes. All he needs to do is wait for these types of quotes to appear, identify them, and capture them. Of course, because of the limited ability of personal analysis, summarization and recognition, and the variability of the mainstream population involved in the market, even if the trader sees a sign of a market that he believes has obvious characteristics, it may be an “illusion”. And if you encounter the "illusion", a coping strategy is good, that is, stop loss in time. This is the technical analysis and its application.
Technical analysis pays attention to "re-enactment". In fact, the market is not repeating graphics, but human nature. The market sentiment consisting of the emotions of a living person must be regular, because human nature is immutable and regular. It's just that market sentiment is made up of thousands of participants with different emotions, which are more complicated and difficult to identify than individual emotion. But no matter what, when the sentiment of the mainstream groups participating in the market tends to be same, it is easy to identify. I think this might be the essence of technical analysis.