Futures For You
| INSIDE THE FUTURES
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Want to learn how the futures markets really work? Dan
O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com),
responds to your questions about today's futures markets.
To submit a question, post your question to our website
at http://Message-Boards.Traders.com. Answers will be posted there, and
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Dan O'Neil |
TECHNICALITIES
It doesn't seem like you can trade commodities without at least
some knowledge of technical analysis. What are some of the more popular
technical indicators to incorporate into my research?
There's no question charting and technical analysis play significant
roles in the futures markets. Even traders who focus on the fundamentals
tend to incorporate some technical analysis into their decision-making.
Trading based at least in part on the established statistical movement
of some markets can spare a trader not only from the emotional swings of
trading, but the confusion of weeding through a conflicting picture as
well.
When you're beginning to look at technical analysis, remember: each
futures market has its own trading personality, and a combination of charting
strategies is often needed to identify and confirm trading opportunities.
While every trader has his or her own preferred studies and methods, four
common indicators generally constitute the basic building blocks of most
technical analysis. Here's a look at several of the most popular technical
studies among individual futures traders.
Moving average convergence/divergence (MACD): The MACD is used
to measure short-term momentum. The MACD tends to be one of the earliest
generators of buy & sell signals, providing a tipoff of flagging momentum
in a given market trend. The MACD is calculated by taking the difference
between two exponential moving averages, typically the 26-day and 12-day
averages.
One of the most common ways to use the MACD is to buy or sell a futures
contract when it crosses the signal line, or zero (sell when the MACD falls
below the signal line, or buy when it climbs above the signal line). The
MACD can also be used to identify an overbought or oversold market. When
the shorter moving average moves away from the longer moving average (the
MACD rises), it suggests that current movement in a particular direction
may begin to wane and soon return to more realistic levels. The MACD divergences
from the trend of the futures price may also signal a trend reversal.
Relative strength index (RSI): The RSI is used to measure the
velocity of directional movement, but it does not, as its name might suggest,
compare the relative strength of different futures markets. Instead, this
indicator measures the internal strength of a single futures contract,
plotting a value from zero to 100. The RSI above 70 is generally considered
overbought and indicates a sell signal, while below 30 is considered oversold
and implies a buy. Some traders use the RSI to identify the long-term trend
and use extreme readings for entry/exit points. If the long-term trend
is bearish, overbought readings could represent potential points at which
to establish or add to shorts.
Another method of analyzing the RSI is to look for divergences between
the underlying futures market and its RSI. For example, if the futures
contract is rallying to a new high but the RSI fails to surpass its previous
high, the possibility of a false breakout and an impending price reversal
must be considered.
Stochastics: The stochastic indicator can help identify whether
bulls or bears are in control of a market. Stochastics can point out short-term
price fluctuations to determine whether the current price level is sustainable
or on the verge of the reversing course. Oscillators like stochastics can
help pinpoint entry or exit points by signaling potential turning points
as well as indicate a broader, more significant upturn or downturn in the
trend.
Using a scale of zero to 100, the most common way to analyze stochastics
is to sell when the reading is above 80, suggesting overbought conditions,
and to buy when the reading is below 20, which may imply an oversold market.
The direction of the stochastics should confirm price movement (rising
stochastics confirm a rising futures price). Divergence occurs when the
stochastic values are moving in one direction and the futures price is
moving in the other, which could imply a turning point in the market, such
as where prices are making a series of new highs and the stochastic indicator
is failing to surpass its previous highs. A false breakout may be afoot
if a new high in price is reached without a new high in stochastics.
Bollinger Bands: Bollinger Bands behave like moving averages
and are plotted at two standard deviations above or below the moving average,
typically using either the simple moving average or an exponential moving
average to increase the sensitivity of the indicator. Bollinger Bands not
only help identify relative price levels and volatility, they can also
be combined with price action and other indicators to generate signals
and act as a precursor to significant moves.
Traders typically use Bollinger Bands to detect unsustainable price
moves, capture changes in trend, target support & resistance levels,
and spot contractions or expansions in volatility. Some traders believe
that when prices break above or below an upper or lower band, it is an
indication a breakout is occurring and will then take a position in the
direction of the breakout. Others use Bollinger Bands as an indicator of
overbought and oversold conditions. When a price touches the top of the
band, traders assume the futures contract is overbought and will sell futures,
believing it will ultimately revert back to the mean. Conversely, if the
price touches the bottom, traders figure the market is oversold and will
rally back toward the top of the band and thus buy futures. The spacing
or width of the band is dependent on the volatility of the prices; higher
volatility is typically characterized by a wider band, while lower volatility
results in a narrower band.
Originally published in the August 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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