If you're now well-versed in "the bar chart basics" of technical analysis to follow the ag commodities markets, the next step is to better understand a few of the pro tips to navigating the technical side of the grain markets. And how to think of them a little differently.
Here's how technical studies - a common approach used by advisors serving farmers - can help you to follow the grain markets more closely.
A technical study will typically fall into one of three basic categories:
A component or measure of futures action, such as volume, open interest or Commitments of Traders reports (published by the Commodity Futures Trading Commission), that is displayed graphically, but separately below the chart and on the same time scale as the chart itself (daily, weekly or monthly).
A separate mathematical calculation derived from price action and displayed as a line graph superimposed over a chart for comparison with an actual price trend.
A separate mathematical algorithm or oscillator derived from price action, but displayed graphically and separately below the actual price chart. view; the monthly chart a 50,000-foot view.
A TECHNICAL STUDY VARIES SIGNIFICANTLY FROM CHART ANALYSIS in that it is not a formation identified on the price chart. Instead, it is a separate calculation displayed graphically and superimposed over the chart itself or below the chart.
BUT, THERE ARE ACTUALLY DOZENS OF DIFFERENT TECHNICAL STUDIES.
Some work better than others in different types of markets, such as highly volatile markets versus markets in choppy, directionless sideways trends. Some work better for short-term trading, such as day-trading, while others work better for longer-term position trading. Some technical studies are even better suited to some types of traders. Some professional technicians will say that while their field is rooted in math, it can be more art than science.
THERE ARE FIVE POPULAR TYPES OF TECH STUDIES used by professional advisors serving farmers. These studies have proven, over time, to be the most commonly referenced among market consultants to agribusiness:
Moving averages are exactly what the name implies: line graphs showing the average closing price over a specific number of days. How many days varies with whether the trader is wanting to identify short, medium or long-term price trends. There are moving averages plotted for as few as three days or as many as 200 days.
Conversationally, it is sometimes referred to as the “Mac-D.” It is comprised of two exponential moving averages that help measure the momentum of a trend. The first component is the difference between these two EMAs, plotted against a centerline that is defined as the point at which the two moving averages are equal.
The next component is the EMA of that MACD line, also plotted on the chart. In simpler terms, you might think of MACD as a derivative of price-based moving averages. Experts in MACD say to think of it as a derivative of price-based moving averages.
The standard RSI calculation uses 14 trading days as a basis. It operates within a defined range from 0 to 100 and identifies overbought conditions (selling zones) when above 70 and oversold conditions (buying zones) when below 30.
The stochastics oscillator is another widely followed momentum indicator. It operates on the idea that prices should be closing near the highs of daily trading ranges during healthy uptrends, and toward the lower ends of daily trading ranges during entrenched downtrends.
Like the RSI, the stochastic oscillator is also plotted from 0 to 100. Readings above 80 are considered overbought, while readings below 20 are considered oversold. Any reading between 20-80 is considered a sort of “no man’s land,” neither overbought or oversold.
Among the most common and challenging questions for hedgers and traders alike is when a major top following a long uptrend, or a major bottom after a long downtrend, has finally been confirmed. They might ask themselves...
“How much of that big uptrend will the market ‘retrace’ on the way down, now that it’s over?”
“How much of that big downtrend will the market now ‘retrace’ on its recovery?”
These questions, or ones like them, can be traced back in history as far as markets have had records and charts. But the answers to those questions were discovered by an 13th century Italian merchant named Leonardo Fibonacci, who also happened to be a mathematical genius. He discovered numerical sequences in nature that had applications in market scenarios as well. They became known as “Fibonacci ratios” or simply “Fibonacci numbers.”
The modern era of technical analysis originated in stock market studies and many of the same principles and studies have relevance in commodity futures as well. There are many sources of education on technical analysis - don't shy away from those that focus on technical analysis of stock prices to help you improve your approach to grain marketing.
The views expressed in this article are the author's alone and not those of Farmer's Business Network, Inc., its affiliates or members.