At no time have I seen something like all the methods which are coming on stream for the use in forecasting commodity prices . Hundreds or different approaches and techniques are out there. Here we’ll only briefly look at a few .
Some are conservative and those I use personally I’ll put an asterisk beside. Listed in this chapter 36 ways of forecasting prices are shared. This does not take into consideration all the wonderful glorious little tidbits that can be provided through a P&L charting technical analysis course.
( P&L charting makes this author happy , for it lets this author on a daily basis and more be able to quantify price action. I don’t know of any other system where more than trend or congestion the activity of the day means more in which prices are trading . Each day’s activity through the use of P&L charting can show the evolution of a congestion or trend, sometimes within one day . )
Actually, this author is most irritated by traders that think that their weighted moving averages, volume oscillator, resistance index, balance volume, and who knows what all else , – basis, cash , – are the only system which is effective. And, the one they happen to use is the only effective one and they never have any real use for seasonals, contrarian opinion, volume, oscillators, momentum indices, indices, other options , and seem to be blind to approaches evolved by others. ( Yes. Now I got that out .)
Many times these traders do not even use their own systems and to me it seems, to be continually fighting the market . Assuming they have taken a technical analysis course and has a trading plan incorporating several methods of forecasting prices and they are combined to help him profit from the market continually, then this is one trader you can listen to. In the planning section , this author will succinctly portray his approaches to the market place and the flexibility may surprise you .
There are three basic methods to analyze the market behavior of commodity prices .
1. fundamental
2. mechanical
3. technical
FUNDAMENTAL
Often the market goes completely contrary to fundamental considerations due to various factors . The fundamental trader is interested in long range price movements and have to be ready to wait . Fundamental traders may deny this, but you must take into account too many external factors , like the response that occurs to influences that are fundamental, reflected in the fluctuations day by day . So for analysis, there is now reason to seek them out .
MECHANICAL
Methods that are mechanical use only price to determine what action to take and this action does not require any decision on the part of the trader . There are three mechanical methods .
1. chart
2. computer summaries
3. moving averages
Going through a technical analysis course will teach you to follow the rules of trading faithfully and usually a mathematical formula is used as its basis to give you the trading time that is right. The computer tells you what a mathematical formula thinks you should do . One of the great things about using the mechanical method is that you can back check it . Computer based methods are often biased towards trend analysis that is mathematical , using different trading systems, such as moving averages. The computer can read charts for you and it can formulate and test any and all decision rules .
TECHNICAL
Over the past years , a vast amount of work has been done to give means of tools that are technical, – all with the aim of anticipating futures prices from trading statistics , i.e. O.I., price, and volume.
There are four broad areas of the technical approach .
- 1) patterns on price charts
- 2) methods that follow trends
- 3) character of market analysis
- 4) structural theories.
For charting, there are a variety of methods . The following are the most popular :
- a. daily high/low/close bar charts
- b. point and figure methodology
- c. moving average of closing prices
The lists of approaches taken to technical analysis can be cataloged by these approaches that are technical .
- 1) tape or board reading
- 2) price chart analysis – which includes the following
- a. price trends
- b. resistance and support
- c. consolidation ( continuation and reversal )
- d. price patterns and formations
- e. the measurement rules
- f. wave theory
- 3) volume and open interest analysis
- 4) other technical indicators including the following:
- a. relative performance measures
- b. periodic price performance study
- c. study of opinion and contrary opinion
Later there will be more discussion of this.
