Beginning Commodity Futures TradingBeginning commodity futures trading involves a lot of hard work and can be confusing at times. One means of helping to gain perspective and trading advantage when beginning commodity futures trading is to approach the subject through the elements of Candlestick basics. Candlestick analysis goes back to Japanese rice traders using Candlestick charting in the 18th century. Japanese Candlestick charts allow someone beginning commodity futures trading to see the futures market and movements for a commodity at a glance. Charts show the opening and closing price for each day, coded as an unfilled candle for upward movement from opening to close and a filled candle for days where the market closes lower that its opening. The upper and lower wicks of each candle represent the market highs and lows for the day and are commonly used as indicators of bullish and bearish market tendencies when compared to the length of the candlestick body.
Japanese Candlesticks allow technical analysis of commodity futures. The old saying in Japanese Candlesticks is to let the market tell you what the market will do. A commodity trader using technical analysis charts such as Japanese Candlesticks can be very well steeped in fundamental analysis of the commodity he or she is trading but the trader also knows that Candlestick chart formations are the distillation of what everyone trading futures in the commodity knows and believes, represented in the precise market movement for each day.
Japanese Candlesticks are the result of recording market movements and coming to understand what Candlestick pattern formations will reliably predict. A very simple example of a Candlestick signal is a long upper candle wick of at least the length of the candle. Just by itself this is considered a bullish signal. Thinking in modern trading terms of support and resistance zones one can see a commodity futures price running up and testing a resistance level and then dropping back substantially. The correct terms for the upper and lower wicks are shadows, the upper and lower shadow. A long upper shadow on a filled in Candlestick means that the futures price went fairly high, above the opening price, found no support, and dropped back to below the opening price at the close of the day. Someone beginning in commodity futures trading could interpret this signal to indicate that the market will be trending lower.
Those beginning commodity futures trading should not go out tomorrow and buy or sell futures based on the tiny example noted above. There is a learning curve in commodity futures trading and in Candlestick trading. But, start with the basics and the rest will develop.
Above we noted the example of the commodities trader steeped in fundamentals who relies heavily on the technical analysis tools of Japanese Candlesticks. Using technical analysis with Candlesticks does not preclude a broad and deep understanding of the fundamentals of the commodities one is trading futures in. Fundamental and technical analysis combined can be a potent combination for long term, substantial profits. Whether traders in wheat futures are interested in the weather in North Dakota or if they are futures trading soybeans and are interested in weather conditions and genetically engineered crop varieties in Brazil, combining technical analysis with fundamental knowledge will help create beginning commodity futures trading profits.
Market Direction: Candlestick signals and patterns show what is occurring in investor sentiment. This past week, it could be easily assessed the investor sentiment did not know which way to move the markets. Obviously, this is not the market environment needed to make good profits. But it did set up the analysis for specific results to occur. There will be times when not being in the market is most prudent. This is hard to do if you are an investor that needs to be making money all the time. Traders that make their living from the markets have a hard time going to cash, even if it is just for a few days. However, there is a great benefit from sitting out of the market for a few days. Candlestick signals and patterns require time to develop. As seen over the past week, there was no identifiable direction to the market. What could be observed was investor sentiment creating profitable scenarios.
The Dow finished as a Doji on Friday. It was trading right on the T-line. This made the analysis very simple from Monday's trading. At the premarket futures indicated a weaker market, that would have been more confirmation that the 50 day moving average was going to act as resistance. Using the simple rule of a Doji, the direction of the trend will be how they open trading after a Doji. A weaker open today would have been enough evidence the Bears were in control, it was time to be shorting.
The bullish analysis had better prospects. While the Dow closed as a Doji, the NASDAQ also closed as a Doji but with positive trading closing just above the 50 day moving average. It was showing evidence the T. line was acting as a support level. Over the past few days of trading, the NASDAQ was showing more bullish indicators than the Dow. A positive open would provide further confirmation that a j-hook was in progress. Today's premarket futures indicated the Bulls were present. This made for very easy investment decisions.
If the markets indexes are showing the prospects of a J-hook pattern, it can be easily assumed that there are individual stock J-hook patterns also ready to confirm. CSE was recommended because it was setting up for a potential J-hook pattern breakout. It is often asked when do you purchase a position after the open. The answer is simple. When everything is in alignment, by immediately. If the market is opening positive, as would be expected in a specific pattern move and the stock position you are anticipating buying is also opening positive, confirming a pattern, buy on the open. These are the parameters for a position doing what it is supposed to. There are very easy to learn techniques for when to buy immediately and when to wait a few minutes when using candlestick analysis. This information will save you from getting into positions to early in some circumstances and showing you when to buy immediately in other circumstances.
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