Technical Analysis: Basic Concepts Every Trader Must Know – Part 1

| August 7, 2013 | 0 Comments

There are two types of analysis when it comes to commodity investing- technical and fundamental.

Fundamental analysis involves researching underlying real world factors that help determine the price of a certain commodity.  For example, the USDA’s monthly World Agricultural Supply and Demand Estimates (WASDE) reports provide essential fundamental data that helps investors determine grain prices.

On the other hand, technical analysis focuses on a market’s price action…

Daily, weekly, and monthly market gyrations not only determine prices, but used in conjunction with certain charting tools, can give you an idea of where prices are headed next. 

So how do you use technical analysis to your advantage?

Over the next few weeks, I’m going to show you a few technical analysis basics that every commodity trader/investor must know.  These concepts are so essential to your investing success that trading without them is akin to swimming against the current of a fast moving river.  In other words, your failure as an investor is virtually guaranteed.

But before we get started, there’s something you must realize…

 Analyzing charts to determine future prices is more of an art than a science.

Different analysts can look at the exact same chart and come to different conclusions.  That’s why skeptics are quick to dismiss technical analysis.

However, the fact that technical analysis is subjective shouldn’t sway you from doing the essential tasks I’m about to share with you.  

That’s because using technical analysis provides a great way to control risk in your investing.  After all, knowing when to steer clear of a commodity is just as important as knowing when to buy it.

So without further ado, let’s look at the first technical analysis concept every investor must know…

Understanding Trends:

Determining a trend is realizing whether a market is moving up, down, or sideways over a specific time frame.   Understanding this factor is important because in most cases your investment should be aligned with the underlying market trend.  In other words, you don’t want to fight the market. 

An example would be buying into a market that’s stuck in a firm downtrend.  You’re buying something that the majority of other investors are selling.

Let me show you what I mean…

Wheat

As you can see, wheat is currently stuck in a firm downtrend on a yearly basis.  We know this because the price is moving from the upper left to the lower right corner of the chart.  What’s more, I drew the blue trend line connecting the intermittent short-term market tops, further identifying the downtrend.

This is technical analysis in its most basic form.  But simply knowing that this commodity is stuck in a downtrend helps you make an important trading decision.

Should you buy, sell, or stick to the sidelines in wheat?

The answer is simple.  With wheat stuck in a downtrend, it’s best to either sell wheat short or stick to the sidelines.   After all, if you had bought wheat at any point in the past year, you would currently be sitting on losses.

Now, at some point, wheat will become too cheap.  Demand will increase and producers will plant more profitable crops.  This will alter wheat’s supply/demand balance, which will ultimately move prices higher.

But the fact is, you don’t know how far the price of wheat can fall before that happens.  It’s best to wait until wheat breaks from its brutal downtrend and forms a bottoming pattern.  That’s when it will be time to get long the market.

As you can see, one simple line provides plenty of valuable information…

We’ll be covering additional technical analysis concepts in coming days and weeks, so stay tuned to Commodity Trading Research!

Until Next Time,

Justin Bennett

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Category: Commodities, Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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