Chapter 2 Success and Failure
of Technical Trading Strategies
in the Cocoa Futures Market
2.1 Introduction
This chapter is an attempt to answer questions raised by a financial practitioner, Guido Veenstra, employed at the leading Dutch cocoa-trading firm, Unicom International B.V. at Zaandam. Unicom is part of a bigger consortium that buys crops of cocoa at the Ivory Coast, where it has a plant to make some first refinements of the raw cocoa. The cocoa beans are shipped to Europe where they are transformed to cocoa-butter, cocoa-powder and cocoa-mass in plants in France and Spain. These raw cocoa products serve as production factors in the chocolate industry. The first goal of Unicom is to sell the raw cocoa beans as well as the raw cocoa products to chocolate manufacturers. A second important task of Unicom is to control the financial risks of the whole consortium. The consortium faces currency risk as well as cocoa price risk. Unicom monitors the product streams and uses cocoa futures contracts, mainly those traded at the London International Financial Futures Exchange (LIFFE), to hedge the price risk. Unicom trades cocoa futures through brokers. However, the commission fees give the brokers an incentive to contact their clients frequently and to give them sometimes unwanted advice to trade as much as possible. Brokers' advices are partly based on technical analysis.In addition to cocoa producers, more and more speculators seem to be trading on the cocoa futures markets who use technical analysis as a forecasting tool. If a lot of speculators with a large amount of money are trading in a market, they may affect realized
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