There are many different types of asset classes that can provide lucrative returns if the proper strategies are embraced. Common examples include blue-chips stocks, Forex pairs, indices, and exchange-traded funds (ETFs). Having said this, commodities enjoy particular popularity thanks to their diverse nature. Investing in commodities may also be used to offset adverse market conditions such as inflation or perceived volatility.
Traders must still become familiar with basic principles if they hope to take advantage of the options at their disposal. One of the most common involves the ability to perform technical analyses. The purpose of this article is to appreciate why a technical approach to trading represents such a valuable methodology. We can then move on to discuss a handful of unique approaches.
What Does a Technical Analysis Involve?
So, what exactly is a technical analysis? We should mention that this is only one blueprint that traders may use. The other plan of action involves what is known as a technical analysis. It pays to define each
- A technical analysis is associated with examining market movements and share prices to determine predominant trends in specific investment products.
- A fundamental analysis instead involves the evaluation of discrete metrics such as economic indicators and financial statements. The intention here is to better understand the underlying value of a specific asset.
So, what can we conclude from these two observations? One important takeaway point is that fundamental analyses tend to be more suited for long-term positions (such as an individual who wishes to hold a blue-chip stock for years before selling). Due to the discrete nature of technical analyses, they are often employed by investors who wish to capitalise on short- to medium-term market trends.
Still, we should mention that both strategies represent two sides of the same proverbial coin. Astute institutional investors (and large multinational trading firms) will frequently use each to compliment the other; resulting in a more well-rounded strategy, and ideal for those who wish to establish a diverse portfolio.
Two Unique Tools
We will now move on to examine two types of indicators which can be used to obtain a bit of much-needed insight before making any type of investment decision.
Moving Averages
The term “moving average” is relatively simple to explain. As the phrase might already suggest, a moving average is nothing more than a summary of asset values within a specific period of time (such as the price of gold per troy ounce over a period of nine consecutive months). The aggregate sum of these values is then divided by time periods (in this case, the number of months or weeks may be used as the divisor).
Tools such as a moving average indicator (also known as an MA indicator) can then be used to better appreciate the direction of the asset in question. Furthermore, these indicators can be used to filter out extraneous “noise” such as one-off price swings that might otherwise skew a short-term analysis.
Trend Reversals
Yet another powerful utility at the disposal of investors is sometimes called a stochastic oscillator. One primary purpose is to help traders identify upcoming trend reversals (such as if the price of a certain commodity is expected to change direction when compared to previous movements). The ability to pinpoint these instances can help traders know the best time to enter or exit a position.
A stochastic indicator serves an additional purpose. It can be used to measure the momentum of an asset. Why is this important? Most commodities will begin to experience price fluctuations immediately before a trend reversal. Not only can such an indicator be used as a predictive tool, but it will once again provide relatively clear signals so that traders can take the appropriate action.
Tools of the Trade
Note that this has been only a brief overview of two common technical analyses. Each of these warrants a closer examination; particularly by those who are looking to include them within their current trading strategy.
Both are equally applicable when discussing institutional-level positions, as they can serve as a means to develop a more conservative approach to commodities trading; helping to minimise potential open-market risks by providing advanced insight.
There are likewise many other technical analyses that institutional investment platforms will employ. These can be based around the needs of the trader, the asset class, or market conditions. Experts will ultimately determine which ones to use; providing clients with a greater degree of insight and clarity.
