Trading and Analysis

Course Overview

“Technical and fundamental signals often conflict with each other. There are times when the charts signal one direction and fundamentals scream another. An investor with knowledge of both can effectively enhance a portfolio by understanding commodity fundamentals and by using technical signals to get into or out of investment positions.” - Andy Hecht, How to Make Money with Commodities

You have created your trading plan and thought through a money management strategy that works best for you. Now it’s time to define how you plan to make buy and sell decisions.

•What type of trader you are going to be?
•What type of tools or analysis will help you achieve your personal goals?

Some traders and investors like to look at price patterns on a chart and technical indicators to make a decision, i.e., technical analysis. Some prefer to back up their decisions with news and data, i.e., fundamental analysis. Still others combine these two techniques.

Many traders attempt to combine technical and fundamental analysis to derive a benefit from both approaches, each with their own virtues and drawbacks. Whether you choose to employ fundamentals, technicals or both to help predict the future, always remember that the current market price is always the right price. The market always knows best because the latest price is the one at which current sellers and current buyers are meeting in a fair and transparent marketplace.

In this section, you’ll explore the differences between fundamental analysis and technical analysis. Then, you’ll learn an important concept that traders need to understand—the difference between trending and anti-trending markets.

Technical Analysis



The theory behind this method of charting is that there is a 1:1 relationship between price movement and the price reversal. Point-and-Figure charts show price reversals over time. Unlike bar charts, Point & Figure charts ignore small price fluctuations, trading volume and the passage of time. Each X or O represents every time the market price moves by a defined amount (such as 5, 10, or 20 ticks).

In a point and figure chart, X's represent advancing prices and 0's represent declining prices. When the market reverses direction by the defined amount, a new column starts to the right at the corresponding price level. If the price moves in either direction by less than the certain amount (the minimum interval), no new marks will be made, no matter how much time passes. For instance, if prices are advancing and then decline by the correct amount of ticks, you begin an 'O' column after the 'X' column.

The price interval chosen to track market movement significantly affects the level of detail in the P&F chart. This price interval is referred to as the reversal number. For this reason, P&F charts are used to represent the inter-day (between-day) trading dynamics, and can be used to find congestion areas.

Point & Figure (P&F) charts are especially useful to short-term speculators. Placing the X's & O's on a piece of paper is simply a method of depicting the short-term price swings. No regular time interval exists at the bottom of a P&F chart. The reversal number (in the scale) determines when to move to the right on the chart. Volume and open interest is not available on a P&F chart.

:::::> Scale
Box size multiplied by reversal number (e.g. .01 x .03)

:::::> Box size
any multiple of the minimum tic

:::::> Reversal number
the number of boxes required to terminate one column and begin the next column

commodity futures point & figure charts

The following will give you a solid base to further study two important principles of P&F charting: support levels and resistance levels.

You should remember that both support and resistance are shown in horizontal lines and trend lines represented with 45-degree angles.

Support Levels

point and figure chart support levels

A support level is a level at which investors and traders alike believe prices will start to move higher after hitting the support mark. Have a look at the three O's in the example above to see what this means. A horizontal row of O's is what you are looking for when zeroing in on a trend reversal and a uptrend to begin.

Resistance Levels

point and figure chart resistance level

A horizontal row of X's marks the resistance levels you need to be looking for in the P&F charting study. Studies of trend lines have shown that a break through resistance levels generally occurs with great gusto, that is, with big volume and a rapid increasing price.


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