Learn to earn in Long Term Trade in Commodities through Technical Analysis

Commodities Market trading is a little bit difficult as it needs reasonable knowledge of the fundamental factors of demand and supply of the commodity under trade as well as some basic knowledge of the Technical Analysis to decide the entry and exit point.

There are numerous articles and study material freely available about Fundamental and Technical Analysis.

However here we will discuss about some basic concepts of technical analysis which we have found very useful and simple.

We will learn how  to use indicators to make a "DECISION MATRIX TO IDENTIFY A RIGHT TRADE" from a Long Term Trading Perspective. 



Before we start, few points must be noted down.

1. All known information is reflected in the price.
2. Market moves on the basis of expectations and emotions of the Traders i.e (Buyers and sellers). 
3. No Single Technical indicator is right all the time.
4. You too don't have to be right all the time.
5. Practice to learn about few reliable indicators and stick to them.
6. Be consistent and disciplined in your approach. 
7. Most of the money is being made in a TREND, especially as far as futures market is concerned.
8. Patience and discipline is needed as you must wait for clear trend in the market in order to succeed on the long run.
9. As long as the indicators are in neutral territory avoid to trade unless you are a very knowledgeable trader.

Terms used in Technical analysis

What is Technical Analysis

• In simplest words, it is the examination of past price movement to forecast future price movement.
• In Technical analysis, price refers to any combination of open, high, low and close for a given commodity over a specific time frame.
• The time frame can be intraday, daily, weekly or monthly or yearly etc.

Important Types of Technical Charts

Line charts, Bar charts, Japanese Candlesticks chart

Candlesticks Chart Pattern

Line Chart Pattern

Bar Chart Pattern

Market Trend

Up trend, Down trend, Sideways trend

Moving Averages (MA)

ØThese are some of the oldest and most useful indicators.

ØBasically moving averages show TREND.

ØA BUY signal is given when price crosses above the moving average and the MA is directed upward.

ØA SELL signal is given when price drop below the MA and MA is directed downward.

ØBuy or Sell signal is not given when MA changes direction but price does not cross above or below the MA.

ØTHE MOVING AVERAGES SERVES AS SUPPORT AND RESISTANCE.

Types of Moving Averages

ØSimple Moving Average (SMA)

ØExponential Moving Average (EMA)

ØWeighted Moving Average (WMA)

Typically 5 and 10 are used in EMA in most of the agricultural commodities.

Bollinger Bands (BB)

Bollinger Bands are a kind of trading envelope. They are lines plotted at an interval around a moving average.

Period: The period for which to compute the band.(Typically 10 is used in agricultural commodities)

Band Width: The half-width of the band in terms multiples of standard deviation. Typically 2 is used.

Bollinger Bands consist of a moving average and two standard deviations charted as one line above and one line below the moving average. 

USES:

ØTo determine overbought and oversold zones.

ØTo confirm divergences between prices and indicators.

ØTo project price targets.

ØThe wider the bands are, the greater the volatility is.

ØThe narrower the bands are, the lesser the volatility is. 

Volume

ØVolume can be a barometer of future activity and direction.

ØVolume measures the number of contracts that exchanged hands during the trading session.

ØIt measures market activity and liquidity. Higher volumes means higher liquid contract or commodity and vice-versa.

ØVolume is tracked on an individual delivery month and total symbol basis. 

Open Interest (OI)

ØOpen Interest is applicable for futures and commodities charts only.

ØOpen interest shows the total number of futures contracts that have been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery.

ØWhen both sides are new, open interest increase.

ØWhen only one side is new, open interest remains unchanged.

ØWhen both sides close out, open interest decreases. 

Relative Strength Index (RSI)  ------- (Range : 70-30)

ØIt measures market's strength and weakness.

ØA high RSI, above 70, suggests an overbought or weakening bull market. A low RSI, below 30, implies an oversold market or dying bear market.

ØIt works best when a failure swing occurs between the RSI and market prices. For example, the market makes new highs after a bull market setback, but the RSI fails to exceed its previous highs.

ØWhen price touches the upper BOLLINGER BAND, and RSI is below 70, it is an indicator that trend will continue.

ØWhen Price touches the lower BOLLINGER BAND, and RSI is above 30, down trend will continue.

ØIf a price touches the upper BOLLINGER BAND and RSI is above 70, the trend may reverse and decline.

ØIf a price touches the lower BOLLINGER BAND and RSI is below 30, the trend may reverse and move upward.

Stochastic  (Slow) - (Range : 80-20)

ØIt indicates OVERSOLD & OVERBOUTH market conditions.

ØIn an upward trending market, prices tend to close near their high.

ØIn a downward trending market, prices tend to close near their low.

ØWhen an upward trend matures, prices tend to close further away from their high.

ØWhen a downward trend matures, price tend to close away from their low.

Clusters

ØThe stochastic indicator attempts to determine when price starts to cluster around their low of the day in an up trending market, and cluster around their high in a downtrend. 

Moving Average Convergence/Divergence (MACD)

ØBuy when the oscillator crosses above the slower exponential moving average of the oscillator.

ØConversely, you sell when the oscillator crosses from above to below the exponential moving average of the oscillator.

ØLastly, divergence is possible with the MACD.

ØThe ideal signal would show divergence, clearly break a dominant trend line, and display the crossing of the MACD lines.

How to use the above technical Indicators ---- Learn 

Thus, Exponential Moving Average (EMA), Bollinger Bands (BB), Relative Strength Index, Slow Stochastic and MACD are five major technical tools which we can apply in finding initiation point and exit points. Most of the time you will have a winning trade in long term.