Indicators are very popular for commodities market and commodity trading. To choose an indicator, the trader first needs to identify if the market is trending or ranging. This is important because ranging indicators do not suit trending markets and vice versa. Read below to know more about the top technical indicators for the commodities market.
Moving Averages
The moving average (MA) refers to the average price of a commodity or a stock over a specified period of time. It is the simplest and the most widely used indicators when it comes to technical analysis. For instance, a 5-day moving average is the average of the closing prices of the commodity over the last five days, which include the current day. When the MA is used intra-day, the calculation is based on the current price data instead of the closing price.
The MA usually smooths out the random price movement to bring out the concealed trends. It is usually treated as a lagging indicator that is used to observe and analyze price patterns. There is a buy signal when the price crosses above the MA from bellow the bullish sentiments, while the opposite is indicative of bearish sentiments, thus it is treated as a sell signal.
Moving Average Convergence Divergence (MACD)
The moving average convergence divergence (MACD) is usually used as an effective trend following indicator that uses moving averages or exponential moving averages for calculations.
There is a bullish signal when the MACD is positive in value, with the shorter period EMA being higher or stronger than the longer period EMA. This indicates a rise in the upside momentum. However, as the value begins to decline, it shows a loss in momentum.
In a similar manner, a negative MACD value indicates a bearish situation, and an increase further suggests growing downside momentum. If the negative MACD value decreases, it signals that the downtrend is losing its momentum. There are more interpretations to the movement of these lines such as crossovers.
A bullish crossover is hinted at when the MACD crosses above the signal line in an upward direction.
Relative Strength Index
The Relative Strength Index (RSI) is a popular technical-momentum indicator. It tries to hint at overbought or oversold situations in a market on a scale of zero to 100, meaning it also indicates whether the market has already topped or bottomed.
The market is considered to be overbought if the indicator levels are higher than 70. The market is then oversold when the levels slip past 30.
RSI can also be used to spot divergence and failure swings in addition to overbought and oversold signals. Divergence takes place in situations where the asset is making a new high while RSI fails to move beyond its previous high signaling an impending reversal. If the RSI declines below its previous low, the failure swing will give confirmation to the impending reversal.
Stochastic
The Stochastic indicator is based on the observation that if the prices have experienced an uptrend during the day, then the closing price will usually settle down near the upper end of the recent price range. On the other hand, if the prices have been in a downtrend, then the closing price will settle at the lower end of the price range.
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