Commodities Trading and Technical Analysis

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Most commodity traders incorporate technical analysis into their trading plan. Technical analysis differs from fundamental analysis in that it utilizes prior price or volume action or trends to predict future price moves. Fundamental analysis focuses largely on supply and demand expectations for commodities in order to predict future price moves.

Commodity traders often claim to be in either the technical or fundamental camp. In fact, most commodity traders utilize both methods. Successful traders know that in these markets, it's hard to have too much data.

To begin trading commodities using technical analysis, you will need to have a brokerage account in which you're able to trade futures contracts, the main way traders play the commodity markets. Your trading platform will let you create a price chart of the market you are interested in trading, with the addition of technical indicators that go beyond simple observation of pricing data on a graph.

These indicators can help you monitor and identify such important markers and patterns as buy and sell signals, overbought and oversold price levels, price momentum, and trading ranges—all of which can indicate when to initiate or close out a trade or when to avoid risking a trade altogether, such as when two indicators are providing conflicting signals.

Different Time Frames, Same Signals

One important thing to remember about technical analysis is that the same signals apply to all charts, whether they're five-minute charts for day trading futures or daily, weekly, or monthly charts for longer-term trading. Once you have an understanding of the markers and patterns, you can use them to trade commodity futures over different time frames.

Volume and Open Interest

In addition to technical indicators and pricing information, your trading platform should be able to provide you with two additional important pieces of data: volume and open interest. Trading volume indicates the number of futures contracts that have changed hands during a given time period. Rising trading volume during a period of either rising or falling prices suggests the price trend is likely to continue. Falling trading volume in either of those situations may indicate a price reversal is coming.

Open interest is the number of open positions remaining in the market and may be used to measure investors' confidence in the existing trend. If open interest is falling, more and more investors are closing out their positions and a price reversal may be in the works. If open interest is rising, more and more investors are leaving themselves vulnerable to market reversals, so it's a sign of their confidence in the existing trend.

More Art Than Science

Technical analysis is not an exact science; it is more of an art form. You will never be right every time when you trade commodities, but if you are right more often than you are wrong, you will come out ahead, particularly if your average loss is the same as or less than your average gain.

Practicing in a Demo Account

Before you begin trading with your own money, you should spend a considerable amount of time practicing making trades in a demo account. Expect to make many mistakes at first. After you've gained confidence in your ability to place correct bets often enough to create net gains, you can begin trading in a live market, with actual money at risk.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.