In the futures markets or any market for that matter there are two types: bull markets and bear markets. This law of demand relates to both supply driven and demand driven commodities markets. Supply driven markets are chaotic and quick whereas demand driven markets are slower and tedious. To illustrate an example, since I have a cup of Starbucks latte sitting beside me while I write this, we’ll use the coffee commodities market.
Since coffee is predominantly grown in Africa and South America we will take out geo political factors that may influence the price of the commodity right now, only for this example. Changes in demand tend go be slow due to the natural tendency of humans to be conservative. What will push demand for coffee is how popular big companies like Starbucks and McDonalds can make it. As I write this McDonalds has started a massive “bring back the break” marketing campaign to draw customers in at non-lunch and dinner related times. This type of marketing does increase the demand for the commodity. These types of demands create a supply driven commodities market.
Let’s take the opposite side, say a popular doctor who has a current prime afternoon time slot comes on the TV and say you shouldn’t drink coffee since it linked to increased heart rates and will diminish your life expectancy. Then as a result drinking coffee would be frowned upon and create demand driven market.
As another example take natural events and disasters into account of the Law of Demand. Say an area of a country that is known for growing a large number of coffee beans is hit by a hurricane or flood. Suddenly, the Starbucks and McDonalds of the world cannot get their beans and there is a global shortage which immediately shoots the price of coffee up. As a result, it cuts off marginal consumers who only drink it for the look and the rises back to even out the supply and demand.
Supply driven markets fluctuate a great deal; this volatility creates great trading opportunities. A strike in a leading copper producing country or a new OPEC regulation on the output of barrels of oil can create “limit moves” that can hurt an inexperienced trader.
Any trader who is in the commodities markets needs to be very cognitive of the fact that there are various supply factors that will influence the market. You know how we always talk about the weather? Well knowing what the weather is like in Florida can help you with the orange futures market.
If you’re a trader who is more profitable following trends you should look for supply driven markets and if you find that you ‘re most profitable trades tend to be swing trades, you should look for demand driven markets, you’ll perform better.
When you gauge the market most traders will say a farmer loses his crop three times before harvesting it, that is an analogy for the volatile supply driven market. Once the harvest is known the market turns to a less bumpy demand driven market emerges. Each time channels are redrawn and theories changed being a lazy trader and thinking just cause it happened last time will not make you profitable.