Technical Analysis is a method of analysing financial chart data, that is represented in varying forms, depending on preference and technique, to allow a trade to gauge the market history and current activity, to asses opportunity for trade entry, projected profit and exit. As an aside, there are two camps in analysis; technical and fundamental. I will be writing about fundamental analysis in another article. Despite devotees of each forms analysis, it is considered good practice at least to take some form of fundamental analysis as part of say a longer term trading position and the same is true for fundamental traders, to look at the technical charts, to analyse the current markets.
Now when one hears the words 'Technical Analysis', it conjures up an image of something that is inherently technical and requiring an aptitude for finance, figures and accounting, to be able to understand business and so on. In as much, as any form of that knowledge is useful, it's not critical to understanding technical analysis. In fact, I am going to go out on a bit of a limb here and state this; technical analysis is not technical at all - most of the technical aspects are done for you. What I would prefer to call technical analysis, is in fact 'visual analysis'. As the computer uses algorithms to present the information to you in particular ways, depending on preference and the method of analysis used. It is up to your ability in your understanding of analysis, to visually look at the chart and assess whether that stock for instance is worth trading on. Various overlays can be added to any chart, to show given speed of growth or decline, to represent the amount traded and how quickly, to gauge current upward (bullish) or downward (bearish) trends.
Just as a quick aside, there will soon be a complete free training course on both spread betting but more so, the use of technical analysis and how to apply that, this is going to be a full and complete course, to enable you to begin trading with confidence and what's more it will be completely free.
OK, back to the story. Analysis is neither technical nor difficult, but does require skill and takes a while to learn. One of the key mistakes that a novice using technical analysis for the first time, is that some believe that technical analysis has the ability to predict future price movements. This is impossible. No matter how powerful computers become, how clever the software that is written for them, this is not possible. What technical analysis does give you, is the ability to use well known methods this could be anything from forms of pattern recognition as applied with Japanese Candlestick charts, or OHLC (Open, High, Low, Close) charts, that based on many years of analysis, certain patterns, that are usually very lose in interpretation can sometimes (predict) suggest possibilities for movement in a given direction.
There are also what are known additions called 'Indicators' that represent an aspect, or a combination of data and show this in a new way, within boundaries, which can suggest positions where the market may begin to slow down or speed up. Further, there are overlaying aspects you can add to a chart such as the widely use 'Moving Average' - which is a lagging indicator taking an average of the closing price of the market at a set number of days, say for instance a 20 day moving average, will plot the last 20 days closing prices on the chart as a line. A combination of these moving averages is a very common indicator to show possibilities of where the market is changing trend for example. Talking of trends. Trends are by far the most common and possibly the key aspect of any form of analysis that you should first apply.
'There once was a man from Crew...'
In fact, trading is littered with sayings and here I will present you with by far the most common and one which you shouldn't ignore, in fact I can assure you that I will be saying this many times over the in the training course later - 'Let the trend be your friend'. Essentially, this means, if the trend (the overall movement of the market in one direction or another - up = bullish trend, down = bearish trend) is going up for instance and has been overall for weeks and months, it would be foolish to trade in the opposite direction, certainly if you are looking to take longer time scale position of days or weeks. There are many, many, many tools, techniques, methods, and practices in technical analysis. In fact, in 2009, I wrote a complete training course in analysis, called the Masters Certificate in Technical Analysis. I am in the process of completely re-writing that from the ground up, to make it easier to understand, to make it more open, to breath in new methods - considering a lot has changed in the markets over these last few years and more so, I am going to give you this course, that was marketed at a silly amount of money, absolutely free. Cool huh. Trust me, this won't be some fluff that you see on other sites. Just make sure you look out for it.
Oh just a quick word. I am British, so some of my spelling may seem somewhat odd to my American cousins, such as Analysing, rather than the American spelling Analyzing. You wouldn't believe, over the years that I've been writing about analysis, after all, this is what I am known for writing about, how many people write to me over the years, stating that I am spelling certain words incorrectly - yawn. There, glad we got that out of the way, now you know. Cue smiley face :-)
Analysis then, allows a trader to take information from the trading of a particular item and use that historical data to be presented in differing forms, that allow for a method of analysis to be undertaken. A key point I want to point out here, with basically re-inforces what I was saying earlier about analysis not being able to predict the future, is that analysis ONLY uses historical data and presents that data in a particular way. A result of this, 99% of all indicators and methods are only showing you what has already happened. Let me repeat that and I may in fact put it in large letters - INDICATORS ETC, ONLY SHOW YOU WHAT HAS ALREADY HAPPENED! Algorithms are applied to the data, to represent it in a particular way, which depending on the algorithm, is read a particular way and represents either a change in momentum (the speed of the growth or decline of the chart) or provide some form of average lineage representation - all of which are read particular ways.
For just one article, it's impossible to give you a full idea of what analysis is about, certainly there is no chance for teaching you about analysis, remember to look out for the free course. However, if you need to take anything from this article, it's that technical analysis is not in fact technical, it's more visual, that all technical analysis can do is represent historical data in a particular way, that makes it easier to understand what may or may not be happening with the market and through a great deal of understand for the method of analysis that you are using, and there are plenty, many of which we will cover I promise you, they allow you to judge price movements, entries, exits and project potential profits. This is all that analysis can give you. It is not a crystal ball, that allows you to see into the future.
The commodities market covers a large and developing list of physical products foods, electricity, metals, oils, gas and so on. Initially the commodity markets was strictly for agricultural purposes. This sprung from the development that ensued over the World in the 19th century. With transportation becoming easier and farming on larger scale allowed for more wholesale pricing of common agricultural items; grains, pigs, cattle and so on. A means to trade this began, which was the foundation of the commodity market that we have today. However, the modern commodity market, contains a greater array of products way beyond that of just agriculturally produced items.
The Commodity Market, much like all the other financial markets that I have been discussing, does have a good degree of duality. By that I mean, it serves it's true aim of providing a means for companies to buy contracts to purchase or sell commodity items at a future set contract price. However, as with the dawn of computers and the rise of the ever-greedy financial markets, there has been an increase in the amount of products that can be traded that are derivatives of this same market. Remember that a derivative, is basically a product created that has no intrinsic value on it's own, other than that of the outcome of the contract closing event of being true or not and to what degree, based on the underlying product.
In fact, apart from stock trading which has no ability to short the market, in other words, make money when the market is going down. When I was young and my father invested in the financial markets, all there was, was the stock market and the futures market. The futures market back then was focused on commodity prices (the underlying) but this same market is what companies use to secure the sale or purchase of commodity items. I remember looking at around 16 years old at the promotional material my father received from his broker about the Futures/Options market. It took me a long time to understand how it worked. I simply couldn't get my head around, that you could own something, but never take delivery of it, you could trade it, but only have to pay a fraction of the amount you are buying (or selling) and if the market moved in your favor you would make money.
In many ways, many people, even today, do not understand truly how the markets work and that most trading these days are based on derivatives, very few actually take delivery of the item they have a contract for. Good job really, as when I did trade futures and options (option to buy (call) or sell (put)), I had little experience and did so not really knowing what I was doing. In fact, if truth be known, I was petrified of having a contract go to expiry as I imagined, very early on, I hasten to add, that I would end up with several tonnes of pork belly meat on my doorstep. Needless to say, my moment trading these was very fleeting, till I found Financial Spread Betting.
Spot trading; allows for delivery of the commodity to be taken immediately, or soon after the transaction has taken place. In other words 'on the spot'. The commodity market does have a lot of standards, so inspection is never required, because all products that are delivered, must meet certain standards. If however, inspection is required, then buyers/sellers cannot market on the commodity markets and must use the 'wholesale market'.
The reason 'Spot Trading' exists, basically allows for a manufacturer to purchase additional product for immediate use. Say for instance if demand of a certain item they are manufacturing is outstripping their current supply of XXXX. Then the company in question will use Spot Trading to purchase more, at the current market price.
Forward Contracts; this is a contract between a buyer and a seller, where the price of the commodity item is agreed on the day the contract was created, with a fulfillment date in the future. Standards vary and samples of product are usually taken, to agree a price and future delivery.
Futures Contracts; now this seems almost identical in terms of Forward Contracts, in that there is a contract between the buyer and seller to agree the sale/purchase of a commodity at a price fixed today, with delivery in the future. However, there is a key difference. Forward contracts are an agreement to deliver and the amounts of commodity are agreed in the contract and the contract is always fulfilled - in other words, the 100 tonnes of belly pork is actually delivered. Where as with Futures contracts, the amounts, grade, standards and so on a preset by market standards and delivery. Most futures contacts are never fulfilled. It is simply the trading of these contracts, that allows for speculation on the commodity markets. However, you can of course take the option to purchase the contract to fruition.
Hedging; hedging in the Commodity Market - allow for groups of suppliers to form a cooperative to insure against poor yields of their commodity through the use of futures contracts in the same commodity in which they supply. Therefore, allowing them to hedge any risk of a poor yield, through the ability to profit from that of taking a speculative trade in the futures market. If the supply of the commodity they produce is in short supply, the futures market for that commodity goes up in value and therefore, the cooperative can still profit with a poor yield.
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