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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 the sense that it utilizes prior price action to predict future price moves. Fundamental analysis basically focuses on supply and demand expectations of commodities to predict future price action.

Most commodity traders claim to either be a technical trader or a fundamental trader. In fact, most commodity traders utilize both methods. I mostly trade off the charts but I keep up on the fundamental picture to look for trades and to screen some marginal trades if they conflict with my charts.

To utilize technical analysis when trading commodities, you will want to start by looking at a price chart of the commodity you are interested in trading. There are many free sources on the Internet where you can find futures quotes and charts. Following the trend is one of the golden rules of trading so you will want to look for a chart that is steadily moving higher or lower.

Typically with technical trading, you will want to either buy an up-trending commodity when it is breaking out to new highs or it has corrected from the highs. This is a matter of preference to your individual trading style. I normally like to buy retracements within a trend unless a market is extremely strong. If so, I fell comfortable buying new highs.

The good thing about technical analysis is that it applies to all charts, whether they are 5-minute charts for daytrading futures or daily charts for longer term trading. The first thing you want to do is learn how to read charts and get a basic understanding of what types of patterns and indicators might setup market moves. From there, you can move on to more advanced commodity trading strategies with technical analysis.

It is important to understand that technical analysis is no an exact science. It is more of an art. The same goes for fundamental analysis. You will never be right every time when you trade commodities. Think of it as playing percentages. If you are right more often than you are wrong, you will come out ahead if your average loss is the same as your average gain.

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