What are the technical indicators in commodity trading?
Sep 22, 2022
Every trader or investor makes trade with the sole intention of making profits. For commodities trading, investors use fundamental and technical analysis to make significant decisions like buying, selling, or holding.
In fundamental analysis, supply/demand factors explain the occurrences in the market. On the other hand, technical analysis indicates a price trend that includes the timing and quantum of that price change over a period.
Most commodity traders typically prefer technical analysis because it is appropriate for short-term market analysis and assessing the historical price movement, volume, and trends to form charts to decide future price patterns.
Moving averages are one of the oldest, most critical, and time-tested technical indicators. They determine trends and trend reversals, assess a commodities' strength, and help traders arrive at support and resistance levels. For example, when the commodity touches a moving average and finds it difficult to breach it, it is the likely resistance. Likewise, if a commodity stops declining after touching a moving average, it is likely to have found support. A 200-day moving average is a classic example of this, and it calculates long-term trend directions and finds support and resistance in them.
Bar or high/low/close charts
A bar chart is the most common type of commodity price chart, where daily prices for a particular contract month are plotted as a vertical bar. The top of the bar (or line) indicates the high price for the day, while the bottom is the day's low price. Similarly, a slight horizontal tic on the right side is the closing price. Over several days or weeks, channel lines or trendlines can be used to identify price trends.
For an uptrend in prices, the channel base is depicted as a straight line touching both the lowest possible points on the price movement. After that, the upper channel is drawn parallel to the base just touching one of highest possible price in the series for which the chart is being drawn. Commodity traders watch these charts daily for signs of a change in the direction of price movements.
Moving Average Convergence Divergence Indicator (MACD)
The moving average convergence divergence indicator (MACD) is the difference between the 12-day Exponential Moving Average (EMA) and the 26-day EMA. If the MACD has a positive value or the shorter period EMA is higher than the longer period EMA, it indicates a bullish signal. The nine-day EMA of the MACD is called the signal line, which distinguishes bull and bear indicators. When the MACD crosses above the MACD Signal Line, it indicates a possible buy signal. On the other hand, when the MACD crosses below the MACD Signal Line, it generates a possible sell signal. The difference between the MACD line and the MACD signal line is the MACD Histogram.
Relative Strength Index (RSI)
The relative strength index (RSI) is a widely-used technical-momentum indicator. It determines the overbought and oversold level in a market in the range between 0 to 100, helping a trader understand if it has overbought and oversold. A reading of 70 or more typically indicates the market is overbought, while a reading of 30 and below indicates that the market is oversold and could witness a rally. An intelligent way to use the RSI is to follow the trend and step into the market during pullbacks with solid support or resistance level. The best part about RSI is that you can adjust the parameters on the RSI to cater to your trading style.
Traders can use several indicators, but they must choose the right one for making accurate decisions. When choosing the technical indicators, you need to check that the indicator is aligned and apt for the market conditions. For example, oscillators are suitable for ranging market conditions, while trend-following indicators are apt for trending markets. However, you need to be extra cautious while applying technical indicators because false and misleading signals could result in massive portfolio losses.