On the road ahead for this week, I would like to continue with what I started last week and that was technical analysis. Technical analysis is essentially looking at the patterns in prices in commodities, stocks or various other prices of securities. Many of these patterns are common throughout and some people swear by it and they simply trade on the patterns, regardless of the macro news surrounding the trading. I have only a small background in looking at these patterns from my basic studies of securities and would like to build upon that knowledge while I am partaking in this trading game.
Some of the patterns that I am most familiar with (the ones I remember) are wedges and the head and shoulders. The head and shoulders pattern was seen in soybeans this past month and it looks like this in general (courtesy: my awesome paint skills):
Clearly when looking at this, as an investor in commodities, you would want to try and short right at the peak of the right shoulder. You would hope to be shorting at the head, but in reality that is mostly based on hope and little on the pattern itself. Personally, I was able to short at the neckline to the right of the shoulder. Now, look at the area between mid August and mid September in soybeans (Source: CME Group):
Look a little familiar? Well it should.
Now, what I am seeking to do is really restudy my old book on technical analysis and look through the different patterns. I am by no means an expert. In fact I am barely a beginner, but this week I was able to take advantage of something called a wedge and was able to see some gains (not enough to counter my losses earlier in the week). Want to hear more about the wedge or what it is? Then show me that you’re at least slightly interested by commenting!
I’m interested! I had just been observing the prices over the course of the week before I made my decision. I haven’t really looked at historical patterns of any commodity yet so its about time I learned a little more about technical analysis. What you have described above is quite informative. To summarize, if I understand correctly, there are known trends in commodities (like wedges and head & shoulders), and when looking at monthly price charts, we should be trying to figure out where in the cycle we currently are; correct? What is your understanding of how the trends might vary for different commodities?
Well, essentially, technical analysis ignores any of the macro effects of the entire economy or even industry with the traded security. It simply looks at the pattern, almost completely independent from what is being traded and then seeks to take advantage of the pattern. So, yes, the main idea is to recognize the pattern then to figure out where we are in it, then trade accordingly.