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Fundamentals of Trading Commodities

The fundamentals of trading commodities are those basic principles from which everything else flows. The nuts and bolts, the fundamentals of trading commodities, derive from basic information about commodity supply and demand and, technical commodity trading, how the market reads and reacts to those basics. The eventual price of a commodity on the delivery date of a commodity futures contract will be absolutely based upon supply and demand of the commodity in question. The prices of futures contracts will always be based upon knowledgeable estimates of what that price will be on the delivery date. Traders follow commodities fundamentals with fundamental analysis of factors influencing production, demand, and supply chains. They follow commodities markets with technical analysis tools in order to anticipate short term market trends and market reversal. In beginning commodity futures trading the trader will be well served by taking commodity and futures training.

In basic and advanced commodity and futures trading a trader will learn how weather patterns affect agricultural commodities such as corn futures. He or she will come to understand how gold futures are influenced by the state of the economy and how political upheaval in oil producing states affects oil futures. As a trader comes to understand the fundamentals of trading commodities it becomes clear that most if not all of the fundamentals about commodities are become known by all commodity traders at the same time. To the degree that a trader has sufficient insight to predict major fundamental changes in a commodity he or she will have a very decided and very brief advantage. As an example someone living in the Persian Gulf may have substantial insight into political of the region which in turn might lead to another oil embargo. This trader might buy oil futures or gas futures with a firm belief that prices will soon skyrocket. The rest of the world of traders, however, will get the news about a reduction in output all at the same time. For the vast majority of those in commodity trading the opportunity lies in understanding and effectively trading market reaction to events.

Technical analysis of markets has been around ever since there have been markets. The wise trader has understood how commodity prices fluctuate and has traded accordingly. More formal systems had to wait for rice traders in Japan three hundred years ago. Traders recognized price patterns, recorded them, and named them. They came to realize that the fundamentals of trading commodities included understanding and following Candlestick patterns. The traders who read Candlestick pattern formations were able to more reliably predict and profit from the rise and fall in the price of rice. These same Candlestick analysis tools work today in commodities trading as well as trading stocks and trading options.

Knowing and using the fundamentals of trading commodities helps traders understand the potential range of a commodity price through fundamental analysis. By using technical analysis the trader is able to follow and predict price movement over days, hours, and even minutes during day trading. Of the two, fundamental and technical analysis, it is typically technical analysis that helps the trader with short term decisions on buying and selling commodities.

Market Direction:  The Dow moved right to the 200 day moving average on Friday. After three strong trading days, today's selling was evident from the open that the profit-taking had set in. The fact that it could not get up through the 200 day moving average made it obvious the 200 day MA was acting as resistance. What does this indicate for the price trend. The Bearish Harami revealed the buying had stopped. Witnessing this right at the 200 day moving average immediately allowed for an assessment of what the trend might be doing here. The failure of the Dow to go up through the 200 day moving average made the prospect of a profit-taking pullback to the 50 day moving average very viable.


The same analysis can be applied to the NASDAQ chart. After gapping through the 50 day moving average on Friday, today's selling would make the 50 day moving average a likely target. Knowing the simple rules about candlestick signals and the moving averages allows an investor to make a game plan, even if it is relatively short-term. In the case of the NASDAQ, once a potential resistance level has been breached, prices usually come back and test the resistance level to see if it will act as support. This reason provides foresight to see what type of signal will occur at the 50 day Moving average.


Understanding the makeup of investor sentiment that forms each signal allows an investor to be prepared for the next price move. As illustrated in the Live Cattle chart, the long legged Doji of Friday indicated a possible reversal of the trend. Knowing what should occur after a Doji makes the next days trading relatively easy. Although Live Cattle traded up slightly after the open, it eventually moved in the direction showing the failure of the next uptrend. Once it traded back below the T-line, it could be assumed the Bears are back in control. This would have instigated closing out long positions and/or adding short positions.

Oct Live Cattle

The candlestick signals provide a huge advantage for day traders and commodity traders. When decisions need to be made relatively quickly, knowing what should occur after a candlestick signal allows for immediate action. This is nothing more than hundreds of years of observations in a graphic formation. Learn how to use candlestick signals appropriately and you will put your trading probabilities are greatly in your favor.

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Good Investing,

The Candlestick Forum Team


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Basic Stock Market Training with Candlestick Analysis
September 25 & 26, 2010

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October 16 & 17, 2010
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November 6 & 7, 2010
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