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June 29, 2010
Over or Under Bought
In commodity trading both fundamental analysis and technical analysis have their place. For example, soybean traders, knowing that there is a drought in Brazil, might possibly buy soybean futures, knowing that a major producer of soybeans will have a lower crop yield, driving up soybean prices. Fundamental analysis may also have to do with knowledge of new, genetically engineered, corn seeds said to be able to produce larger yields or disease resistance. Technical analysis has to do with market behavior and one of the useful tools in commodity trading is the Commodity Channel Index (CCI) which helps commodities traders know if a commodity is over or under bought.

The Commodity Channel Index uses the typical price and simple moving average of a commodity to calculate a number that falls either above or below zero. Numbers between +100 and -100 indicate that a commodity (or stock) is comfortably within its trading range. This is the case between 70 and 80 percent of the time, as a rule. Buy or sell signals occur when the CCI falls above 100 or below -100. A CCI calculation outside of the -100 to +100 range implies that a stock is over or under bought. Using technical indicators like the CCI allows traders to take advantage of over or under bought commodities (or stocks and other equities as the CCI works in all markets).

Using the CCI a number above 100 implies that a commodity is under bought given its circumstances and is entering a strong upward trend. This is a buy signal. A CCI number below -100 implies that a commodity is over bought given its circumstances and is entering a downward trend. This is a sell signal. In each case, when the CCI moves back within the normal range the buy or sell position should be closed. This calculation or something similar is typically included in commodity trading software, helping commodities traders determine if a commodity is over or under bought. The CCI index can be “fine tuned” using longer or shorter periods of time for the moving average. This index helps spot price reversals and trend strength as well as price maximums and minimum.

Knowing if a stock is over or under bought fits with Candlestick analysis. This is letting the market say what the market will do. Although the fundamental information about a commodity is typically available to all traders who care to do their homework their trading strategies will differ. Looking to see if a stock is over or under bought lets the trader into the minds of other traders, giving him or her an advantage that can exploited for financial gain. Being able to understand and predict commodity prices by doing both fundamental analysis and technical analysis is the basis of commodities trading. The use of technical tools such as Candlestick charting is integral to predicting moves in the commodities markets as well as in the stock market or in options trading. It comes down to understanding a statistical analysis of group behavior and capitalizing on it.

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