Commodity Futures Charts Trading Technical Indicators
Proper Use of Technical Indicators
Futures trading Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. The following indicators can be used to measure volatility:
Volatility indicators illustrate the size and the magnitude of price fluctuations. In any market there are time periods of high volatility and low volatility. These time periods come in waves: low volatility is replaced by increasing volatility, while after a time period of high volatility there comes a time period of low volatility and so on. Volatility indicators measure the intensity of price fluctuations, providing an insight into the market activity level.
:::::>Average True Range
Average True Range is the average of several true ranges over a defined time period. True range is the greatest of: today's high from today's low, yesterday's close from today's high and yesterday's close to today's low.
Bollinger Bands are envelopes around prices which are plotted at standard deviation levels above and below a moving average. (Standard deviation is a measure of volatility.) The envelope widens when the commodity becomes more volatile and narrows when less volatile. As an indicator, sharp price changes tend to occur after bands tighten (after periods of low volatility). When prices move outside the bands, it can imply trend continuation. A move that originates on one side of band will generally move to the other side band.
It is a good idea to use Bollinger Bands with another indicator, such as RSI. Generally, when upward prices touch the upper Bollinger Band, and RSI is below 70, the trend will continue. However if upward prices touch the upper Bollinger Band and RSI is above 70, the trend may reverse. (The converse is true for downward prices touching the lower Bollinger Band and RSI above/below 30.
:::::>Moving Average (variable)
Variable moving averages are exponential moving averages that automatically adjusts the smoothing constant based on the volatility of the data series. High volatility gets a larger smoothing constant so that more weight is given to current data. Low volatility gets a smaller smoothing constant so that less weight is given to current data.
:::::>Relative Strength Index (RSI)
The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.
This oscillator provides signals about the strength or weakness of a market. It compares the point at which the price of a security closed relative to its price range over a given time period. It is plotted on a scale of 0 to 100 with upper and lower horizontal lines drawn at 20 and 80, and a middle point at 50. A reading near 80 indicates an overbought condition and a reading near 20 oversold. This indicator consists of two lines, %K that is the faster line and %D. When %D crosses %K, a signal is generated. A buy signal is given when %D crosses above %K below 20. When %D crosses below %K above 80, a sell signal is produced. Time period is normally 14 days.
Fibonacci is something that constantly comes up in conversations about the stock market and technical analysis. However, most people remain confused as to what role it can/should play in their own trading strategies and even how to begin to go about actually implementing some kind of Fibonacci strategy.
In the early 13th century, Leonardo of Pisa published "The Book of the Abacus" in Italy. This was Europe’s first exposure to the mathematics work being done in India for over 500 years. Fibonacci, Leonardo’s nickname, learned of the efficiency of the Hindu-Arabic numerals on his travels around the Mediterranean and particularly in Northern Africa. He is most famous for his introduction of, what is now called, the Fibonacci Sequence to the West. He is not the official originator of the summation sequence, although he is often credited as such. Its true origins began 1400 years earlier with the work of Pingala. The sequence is perpetuated by adding the previous number in the series to the succeeding number. The Sequence begins with 0 and 1. 0 and 1 are added together to reach the sum of 1. The sum, 1, is then added to the preceding number in the series, 1, and the sum of 2 is achieved. 2 is then added to the preceding number in the series, 1, and the sum of 3 is achieved. The process is repeated and the series is infinite: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233… The ratios between these numbers are often used in the technical analysis of the markets. For example, if 55 is divided by 89, one reaches 0.618, the golden mean, an important ratio in understanding beauty and balance in the creative arts and nature, as well as the movement and timing of the markets.
Fibonacci analysis is often used in conjunction with Elliot Wave analysis. Elliot wave is a wave principle discovered by Ralph Nelson Elliot during the Great Depression. It is commonly accepted that the markets are fractal in nature and that they are comprised of rhythmic waves in price movement. Elliot Wave applies to both upward and downward movements in the market, but for example’s sake assume a long position. The Elliot Wave basically refers to an Impulse move upward and a Correction move downward. The Impulse move is made up of 3 smaller moves upward and between them, 2 smaller moves downward for a total of 5 moves. These 5 moves are followed by a correction move comprised of 2 smaller downward moves and between them, one smaller upward move. Because markets are fractal, Elliot wave can be especially useful in identifying where the market is in the bigger picture. It may appear that you have a nice Long Setup on the 5 minute chart but on the hourly chart you may actually be finishing the last upward move of the Elliot Wave and are preparing for a reversal. Pay attention to the bigger picture. Do not get so focused in that you are unable to see what is really going on. Always be aware of the Support and Resistance on larger time frames for they hold more ground than the smaller time frames. Remember that every technical analysis tool is just another in your arsenal. In your research, before you begin to trade with real money and forever after, you will become more focused. You will have a full array of tools in your tool box but you will only keep a fraction of them in your tool belt. Along with Fibonacci these may include Bollinger Bands®, Average True Range, Moving Averages Convergence/Divergence, Relative Strength Indicator, Stochastics, and the Commodity Channel Index.
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