Never in my life have I seen anything like the plethora of methods that are coming out to use in commodity price forecasting . There are many approaches and techniques . This chapter will present rather briefly, but a few .
Some are conservative and those I use personally I’ll put an asterisk beside. Listed in this chapter there are approximately thirty-six ways and means of forecasting prices . This doesn’t consider the various great tidbits that can be found with a technical analysis course.
(This author is very happy with P&L charting , because it allows the ability on a daily and intra day basis to quantify price action . I know of no other system where the activity of the day is more important than congestion or trend in the way trading prices are going . Each day’s activity through the use of P&L charting can show the evolution of a congestion or trend, in some cases, in a day. )
Of course, , this author is most irritated by those who believe that their resistance index, moving averages, point and figure, volume oscillator , and who knows what all else , – cash and basis, – are the only effective system . And, that the system that they are using is the only one that will ever be effective and they never have any real use for seasonals, contrarian opinion, volume, oscillators, momentum indices, indices, other options , and are blinded to the approach of others . ( There . Now I got that out .)
Many times these traders don’t use systems of their own and seem to me, at least , to always be fighting the market . If you assume the trader has gone through a technical analysis course and has a trading plan incorporating several methods of forecasting prices and he puts them together in a way he can get trade profits on a regular basis , then listening to this trader is a good idea . In the planning section , the author will portray his own market place approaches 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
Many times the market goes completely contrary to fundamental considerations due to technical and other factors . Fundamental traders are interested in the price movements that are long range and need to be prepared to simply wait. Fundamentalists may deny it , but the external factors you have to consider are too many, like fundamental influences and their natural response , reflected in the fluctuations day by day . So you don’t need to seek them out and analyze them.
MECHANICAL
The mechanical methods only use price to figure out what action to go with and the action doesn’t require a trader’s decision . 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 it is usually based on some mathematical formula to give you the trading time that is right. A mathematical formula is used by the computer, which tells you want to do. One great thing about this method is that back checking can be done. Methods that are computer oriented are often biased towards trend analysis that is mathematical , using various trading systems, like moving averages . Your computer can become a chart reader and all of the decision rules can be both formulated as well as tested.
TECHNICAL
In past decades, a vast amount of work has been done to get technical tools in place , – all aiming to anticipate futures prices from the statistics of trading , e.g. price, volume, O.I .
There are four broad areas of the technical approach .
1) patterns on price charts
2) methods of trend following
3) analysis of character of market
4) structural theories.
Various methods for charting are available. The following are the most popular :
a. bar charts for high/low/close each day
b. point and figure method
c. the average that moves of the prices at closing
Technical analysis lists of various approaches can be cataloged by these approaches that are technical .
1) board or tape reading
2) price charts being analyzed – which includes the following
a. trends in prices
b. support as well as resistance
c. consolidation ( continuation and reversal )
d. price formations and patterns
e. the measurement rules
f. wave theory
3) volume and open interest analysis
4) other technical indicators that may include :
a. measure of the relative performance
b. periodic price performance study
c. opinion survey and contrary opinion
There will be more of this later .