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 literally hundreds of techniques and approaches . Only a few will be presented in this chapter briefly.
Some of them are rather conventional and I’ll put an asterisk by those I use personally . In this chapter alone 36 ways of forecasting prices are shared. This doesn’t even include all the excellent tidbits that can be provided through a P&L charting technical analysis course.
( I’m quite thrilled with P&L charting, because it allows the ability on a daily and intra day basis to quantify price action . I don’t know of any other system wherein each day’s specific activity means more than the trend or congestion in which the prices are being traded. With P&L charting every day’s activity can show the evolution of a congestion or trend, in some cases, in a day. )
However , this author is most irritated by traders that think that their resistance index, moving averages, point and figure, volume oscillator , god knows what else , – cash, basis , – are the only effective system . And, that the system that they are using is the one system that is going to be effective and they never have any real use for volume, open interest, seasonals, fundamentals, contrarian opinion, wave theories, point and figure, moving averages, oscillators, chart patterns, momentum indices, whatever , and are blindfolded to the evolution of anyone else’s approach . ( There . Now I got that out .)
Often these traders don’t even use a system that is theirs and to me it seems, fight the market all the time. If you assume the trader has gone through a technical analysis course and they have a plan for trading that combines various price forecasting methods and he puts them together in a way he can get trade profits on a regular basis , then this trader is worth listening to . In the planning section , this author will succinctly portray his approaches to the market place and you may get surprised at the flexibility of the author.
There are three basic methods to analyze the market behavior of commodity prices .
1. fundamental
2. mechanical
3. technical
FUNDAMENTAL
Often the market goes in the opposite direction of the fundamentals due to various factors . Fundamental traders are interested in the price movements that are long range and must be prepared to wait it out . Although they may deny it , but the external factors you have to consider are too many, like the response that occurs to influences that are fundamental, reflected in the day by day fluctuations . So there’s no need to seek them out for analysis .
MECHANICAL
Mechanical methods only use price to determine what action to take and the trader doesn’t have to decide on the action. Three mechanical methods exist .
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 predict the right time to trade . The computer tells you what a mathematical formula thinks you should do . One great thing about this method is that back checking can be done. Computer oriented methods are often biased towards trend analysis that is mathematical , using various trading systems, like moving averages . The computer can read charts for you and all rules can be formulated and tested .
TECHNICAL
In past decades, a lot of work has been done to erect a means of technical tools , – all trying to use trading statistics to anticipate the futures prices, i.e. O.I., price, and volume.
When it comes to the technical approach, there are four different areas.
- 1) price charts and their patterns
- 2) methods of trend following
- 3) character of market analysis
- 4) structural theories.
There are many different methods for charting . Here are the most popular:
- a. daily high/low/close bar charts
- b. the method of point and figure
- c. the average that moves of the prices at closing
The lists of approaches taken to technical analysis can be cataloged by the following technical approaches .
- 1) tape or board reading
- 2) price chart analysis – which includes the following
- a. the price and its trends
- b. support and 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 different technical indicators that may include :
- a. relative performance measures
- b. study of periodic price performance
- c. contrary opinion and opinion survey
Later there will be more discussion of this.
