Focus On Commodity Trading Technical Analysis
While fundamental analysis looks at supply and demand, commodity trading technical analysis considers what is happening to commodity prices.
A commodity trader who uses the technical analysis approach will say that fundamentals are already priced into the market.
All that remains is for technical analysis of charts to observe the price movements and predict the future direction of commodity markets.
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A fundamental analysis approach to predicting commodity prices relies on production data, consumption patterns, inventory levels and news of economic and political events.
It may seem at times that what fundamental news suggests should happen, such as an industrial dispute in a copper mine in Chile for example, is not reflected in the price action of copper futures as might be expected.
Instead they prefer to act exclusively on the dynamics of chart patterns, support and resistance lines and moving averages.
The key to understanding commodity trading technical analysis is the view that all markets, including those for commodities, follow a trend.
And the technical analyst will watch the price action and the developing trendlines in commodity markets in order to make profitable trades.
To follow trends and see patterns emerge is only the start. Of significant importance is building on the picture in front of the trader on the screen, an d deciding when to enter the market and then when to exit a trade.
It often happens that commodities can trade in a relatively narrow range for some length of time and then when the price action breaks through either a key support or resistance line, a strong trend develops. The commodity trader who can spot such developments in the price action can make significant gains. With the highly leveraged nature of commodity futures contracts, where margins can be as low as 3-5% of contract value, even a relatively small movement in price can mean a potentially large profit or loss.
3 factors that will guide the commodity trader using technical analysis:
These can be, for example, hourly, daily or weekly bar charts. The candlesticks represent the time period and so illustrate the highest and lowest price touched, as well as the opening and closing prices.
For traders who trade for longer than a single day, an activity called position trading (as opposed to intra-day trading), they are likely to use a daily and weekly moving average.
What does volume indicate? This shows the total level of activity in a commodity for a given period, which could be daily, weekly or monthly.
This is the number of commodity futures contracts that have been liquidated at close of business on a trading day. Total contracts will either refer to outstanding long contracts or short contracts, but not both. Alternative or Complimentary Approach As well as using commodity trading technical analysis, the commodity trader can also make use of the various forms of fundamental analysis available across all commodities.
It really depends on what you feel most comfortable with, either focusing on the charts and price action or reading the news, various reports and interest rate announcements or perhaps both.
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