Commodity Investing: Top Technical Indicators

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Commodity Investing: Top Technical Indicators

The basic goal of every trader, investor, or speculator in any asset class is to make trading as lucrative 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 anything from coffee to crude oil.

The fundamental analysis approach 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 previous price patterns, trends, and volume to produce charts in attempt to predict future movement.

Key Takeaways

  • Any trader’s main goal is to earn as much money as possible.
  • Traders must first determine the market.
  • Momentum indicators are the most often used in commodities trading.

Identifying the Market for Commodities

Momentum indicators are the most often used in commodity trading, leading to the well-known proverb “buy low, sell high.” Momentum indicators may also be classified as oscillators or trend-following indicators. Traders must first determine the market (i.e., whether the market is trending or ranging before applying any of these indicators).This is significant since trend following indicators do not perform well in a range market, and oscillators may 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 time, 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 computation is based on the current price data rather than the closing price.

The MA tends to smooth out random price fluctuation in order to reveal hidden patterns. It is a lagging indicator that is used to analyze price trends. When the price crosses above the MA from below, it indicates bullish feelings, whilst the opposite indicates negative 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 misleading signals owing to price swings. Notice how the slope of the MA follows the trend direction in the sample below. A higher MA indicates that momentum is supporting the trend, but a flattening MA indicates that there may be a trend reversal owing to diminishing momentum.

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The blue line in the chart above represents the nine-day moving average, the red line represents the 20-day moving average, and the green line is the 40-day moving average. The 40-day MA is the smoothest and least volatile, while the 9-day MA has the most fluctuation, and the 20-day MA is in the middle.

Moving Average Convergence Divergence (MACD)

Moving average convergence divergence, or MACD, is a popular and successful 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 computed as the 12-day EMA minus the 26-day EMA. The MACD’s nine-day EMA is known as the signal line, and it differentiates 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 a rise in upward momentum, but when the value begins to fall, it indicates a loss of momentum. Similarly, a negative MACD value indicates a bearish condition, whereas an increase indicates increased downward 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.

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The MACD is shown by the orange line in the chart above, while the signal line is represented by the purple line. The difference between the MACD line and the signal line is shown by the MACD histogram (light green bars). The MACD histogram is drawn on the middle line and reflects the difference between the MACD and signal lines, which are represented by bars. When the histogram is positive (above the centerline), the MACD line is above the signal line, indicating a bullish signal.

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Relative Strength Index (RSI)

A common 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 peaked or bottomed. This indicator considers the markets to be overbought over 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.

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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 but 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 prior low.

Be mindful of a trending or range market to acquire more accurate findings, since RSI divergence is not a reliable enough indication in a trending market. The RSI is a highly helpful indicator, particularly when used in conjunction with other indicators.


The Stochastic indicator was developed by renowned securities trader George Lane based on the observation that if prices have been trending upward throughout the day, the closing price would tend to settle at the higher 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 period. 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 version of the%K value and is seen to be the more relevant of the two.

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 produced. When the%K falls through the%D in a downward direction, a bearish signal is created. Divergence also aids in the detection of reversals. The form of a Stochastic bottom and top may also be used as an indication. For example, a deep and wide bottom may suggest that the bears are powerful, and any rebound at this point may be feeble and short-lived.

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Slow Stochastic is a chart featuring %K and %D. The stochastic indicator is an excellent indicator that works well with the RSI and other indicators.

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.

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Bollinger Bands® may assist traders identify turning moments 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 provide misleading indications, particularly if the price swings outside of the trading range. Bollinger Bands® are thought to be ideal for low-frequency trend tracking.

The Bottom Line

There are several technical indicators accessible to traders, and selecting the proper ones is essential for making educated choices. 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 utilizing technical analysis, beginning with Stochastic or Bollinger Bands® is suggested.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Investing entails risk, including the possibility of losing money.

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