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Long Term Commodity Investing

Long term commodity investing can be used as a hedge against inflation, a means of balancing an investment portfolio against the slide of the dollar. The market sets the price of commodity futures based on expectation of what the spot price will be the day of contract expiration. For example, oil futures for July 2010 delivery are $76.31 a barrel for light sweet crude. December 2018 light sweet crude futures are $94.98. Despite oil selling for $150 a barrel just a year or so ago the market only expects to see oil to go up by less than 25% in eight and a half years! If you assume that the market expects to see the dollar languish a bit then the commodity market does not expect to see the price of oil go up. An excellent means of learning long term commodity investing as well as short term trading of commodities is with Commodity and Futures training.

With the use of fundamental and technical analysis traders can follow oil prices, futures prices, the fortunes of oil companies, and the rate of exchange of the dollar. Using such technical analysis tools as Candlestick pattern formations and engaging in Candlestick trading tactics it is possible to profit from trading in the short term. It is also possible to profit from long term commodity investing. In commodity investing over a longer time frame the trader may be more interested in hedging against inflation and the fall of the dollar or in betting that a sustained economic recovery will emerge and drive up the price oil futures, natural gas futures, copper futures and futures in other raw materials.

When considering long term commodity investing the trader needs to learn about which commodities are useful for long term investing. Here we are not talking about buying the commodity itself but in investing in commodity futures. One of the practical reasons for not trading commodities is lack of information. Commodity markets are largely to province of producers and buyers of commodities. Mining companies, for example, will hedge their risk by selling futures contracts. By selling contracts at slightly less than next year’s expected spot price the company will lock in part of their necessary cash flow at a reasonable price. The buyer will likewise lock in a manageable buying price. Commodities traders can profit from these actions. Oil producers, using the preceding example, are interested in having some degree of stability to the oil market. So long as they can lock in a profit on part of their production they will be pleased. If, for example, the price of oil goes up substantially these companies will still profit to a degree on the futures they have sold and more so on then current production. Long term commodity investing in oil futures, for example, could be very lucrative if the recession mends itself and the price of oil goes up. The commodity trader will have bought oil futures for delivery in 2018 at today’s low price. He or she will be able to cancel out the contract by selling at new, higher price. If, in fact, the dollar has slid in value the trader will have successfully hedged against the effects of inflation and pocketed a little extra along the way. In long term commodity investing, fundamental commodity analysis and the investment time frame are important in formulating investing goals.


Market Direction: When is it time to take profits? This is one of the most difficult decisions for most investors. Candlestick analysis provides simple analytical tools that make taking profits a much easier process. Taking profits usually is accompanied by a greed factor. To sell a profitable position has the attached nagging fear of selling too early. "What if I sell now, and the price skyrockets after I sell?" Unfortunately it is this line of thinking that makes most investors give back a majority of their profits. The fear of selling too early often keeps investors in a position well past when they should have sold. Candlestick analysis provides a framework for taking profits. It is incorporated in the initial analysis of most trades. If I candlestick buy signal appears, is the upside potential worth participating in? This is a basic parameter for analyzing whether a trade is worthwhile or not. Analyzing the market indexes provide the same evaluations.

As illustrated in the Dow chart, a Bullish Engulfing signal near the oversold conditions in early June was a good indication an uptrend might be in progress. The 200 day moving average becomes the first viable target. Note how the first day the DOW touched the 200 day moving average, it immediately backed off. Where would have been a good spot to take some profits? When the Dow just touched the 200 day moving average. Why? Because this was probably the same target millions of investors worldwide was watching. The same scenario can be applied to today's chart. Once the Dow broke through the 200 day moving average, the next viable target was the 50 day moving average. It reached that level in the first 30 minutes of trading today. The indicators utilized in candlestick analysis provided the insight to take some profits when the 50 day moving average was initially touched. The prices got to that level very early in the morning. This was stretching the uptrend. Stochastics indicated the trend was in the overbought conditions. The probabilities were in the investors favor by taking some profits once the Dow stretched up to the 50 day moving average.

If there had been continued strength, funds that had been released from profit-taking could now be re-allocated into positions that showed better potential if the 50 day moving average did not show any resistance. This does not take experienced foresight. This is merely analyzing what the prices are doing at levels that everybody else is watching. Extrapolating what the indicators are doing, anticipating what signals could be formed if the confirming indicators have the potential of creating a change of market direction. makes taking profits more comfortable when the time is appropriate.

DOW

The visual aspects of candlesticks permits an investor to anticipate what should occur in the next price move. The difference between the bullish candles and the bearish candles is quickly evaluated because of the visual clarity. For day traders, this becomes an extremely valuable tool. For swing traders it allows for early entry into a 2 -- 10 day trading period. As can be seen in the Lean Hog chart, a profitable day trade set up could be seen. Note how the bullish candles brought the price up through the tee line. The past three trading days essentially use the tee line as a support. The stochastics indicated the uptrend was still in progress. The past three trading days created a small but observable resistance level. With all this information visually available, simple trade assumptions can be made. If the price moves up through the resistance level, the probabilities would be that the uptrend was still in progress. The 50 day moving average would continue to be a very viable target. As can be seen, the price gapped up through the resistance level.

Lean Hogs

Having the visual assessment analyzed with the expectation of what the price should do on the open allows an investor to enter a trade immediately without further confirmation. It is this type of analysis that makes candlestick investing very profitable especially for the intraday trader or the swing traders.

Chat session tonight 8 PM ET

Good Investing,

The Candlestick Forum Team


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