Top Technical Indicators for Commodity Investing

The basic goal of any trader, investor, or speculator in any asset class is to make trading as profitable as possible. We will examine the fundamental and technical analysis approaches used by traders in their buy, sell, or hold decisions in commodities, which encompass everything from coffee to crude oil.

The fundamental analysis technique is seen to be best suited for long-term investing. It is more research-based; it examines supply-demand circumstances, economic policies, and financials as decision-making factors.

Technical analysis is often used by traders since it is ideal for short-term market assessment and evaluates past price patterns, trends, and volume to produce charts to predict future movement.

Identifying the Commodity Market

Momentum indicators are the most widely used in commodity trading, contributing to the well-known proverb “buy low, sell high.” Momentum indicators can also be classified as oscillators or trend-following indicators. Before using any of these indications, traders must first determine the market (i.e., whether it is trending or ranging). This is significant since trend following indicators do not perform well in a range market, and oscillators can be deceiving in a trending market.

Moving Averages

The moving average (MA), which is the average price for a commodity or stock over a specific period, is one of the simplest and most extensively used indicators in technical analysis. A five-period MA, for example, is the average of the closing prices for the previous five days, including the present period. When using this indicator intra-day, the calculation is based on the current price data rather than the closing price.

The MA tends to smooth out random price fluctuation to reveal hidden trends. It is a lagging indicator that is used to analyze price patterns. When the price crosses above the MA from below, it indicates bullish sentiments, whereas the inverse indicates bearish sentiments, resulting in a sell signal.

There are other more complex forms of MA, such as exponential moving average (EMA), volume adjusted moving average, and linear weighted moving average. MA is unsuitable for a range market because it produces false signals owing to price swings. Notice how the slope of the MA follows the trend direction in the sample below. A steeper MA indicates momentum.

Moving Average Convergence Divergence (MACD)

Moving average convergence divergence, or MACD, is a popular and effective indicator created by money manager Gerald Appel. It is a trend-following momentum indicator that calculates using moving averages or exponential moving averages. The MACD is typically calculated as the 12-day EMA minus the 26-day EMA. The MACD’s nine-day EMA is known as the signal line, and it distinguishes between bull and bear indications.

When the MACD is positive, it means that the shorter period EMA is higher (stronger) than the longer period EMA. This indicates an increase in upside momentum, but as the value begins to fall, it indicates a loss of momentum. Similarly, a negative MACD value indicates a bearish situation, whereas an increase indicates increased downside momentum.

If the negative MACD value falls, it indicates that the downtrend is losing momentum. More interpretations of the movement of these lines exist, such as crossovers; a bullish crossover occurs when the MACD crosses over the signal line in an upward direction.

RSI (Relative Strength Index)

A popular technical-momentum indicator is the relative strength index (RSI). It aims to calculate the level of overbought and oversold in a market on a scale of 0 to 100, indicating whether the market has topped or bottomed. This indicator considers the markets to be overbought above 70 and oversold below 30. Welles Wilder, an American technical analyst, suggested using a 14-day RSI. The nine-day and 25-day RSIs have grown in popularity over time.

In addition to overbought and oversold indications, RSI may be used to check for divergence and failure movements. Divergence happens when an asset makes a new high while the RSI fails to rise above its prior high, indicating an oncoming reversal. The failed swing confirms the coming reversal if the RSI goes below its previous low.

Be mindful of a trending or ranging market to acquire more accurate findings, as RSI divergence is not a reliable enough indication in a trending market. The RSI is a very useful indicator, especially when used in conjunction with other indicators.

Stochastic

The Stochastic indicator was developed by renowned securities trader George Lane based on the observation that if prices have been trending upward during the day, the closing price will tend to settle around the upper end of the recent price range.

If prices have been falling, the closing price tends to be closer to the lower end of the price range. The indicator calculates the association between an asset’s closing price and its price range over a certain time. There are two lines in the stochastic oscillator. The %K is the first line, and it compares the closing price to the most recent price range. The second line is the %D (signal line), which is a smoothed representation of the %K value.

This oscillator generates the primary signal when the %K line crosses the %D line. When the %K breaks through the %D in an upward direction, a bullish signal is formed. When the%K falls through the %D in a downward direction, a bearish signal is formed. Divergence also aids in the detection of reversals. The shape of a Stochastic bottom and top can also be used as an indicator. For example, a deep and broad bottom may suggest that the bears are powerful, and any rally at this point may be feeble and short-lived.

The Bollinger Bands

John Bollinger, a financial analyst, invented the Bollinger Band in the 1980s. It is a useful indicator for determining market overbought and oversold levels. Bollinger Bands are three lines: a trend line, an upper line (resistance), and a lower line (support). When the price of the commodity under consideration is variable, the bands tend to grow, and when the prices are range-bound, the bands tend to constrict.

Bollinger Bands can help traders identify turning points in a range-bound market by purchasing when the price falls and touches the lower band and selling when the price rises and touches the upper band. However, once the markets begin to trend, the indicator begins to give false indications, especially if the price swings outside of the trading range. Bollinger Bands are said to be ideal for low-frequency trend following.

In conclusion

There are numerous technical indicators available to traders, and selecting the proper ones is essential for making informed decisions. In terms of market applicability, trend-following indicators are appropriate for trending markets, whilst oscillators are appropriate for range market situations. However, be cautious: incorrectly utilizing technical indicators might result in misleading and erroneous signals, resulting in losses. For individuals who are new to using technical analysis, starting with Stochastic or Bollinger Bands is recommended.

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