Commodity Market – What’s In A Trading Edge
Unless you are able to develop a considerable buying and selling edge over the other traders, you will end up losing your money, even if you are disciplined and organized. In this write-up, I discuss some elements that I use in my trading edge.
Fundamental Analysis
Fundamental analysis could be the process of evaluating the monetary condition of a company using monetary reports, price/earning ratios, revenues, market share, sales and growth, etc. This type of analysis can be time consuming so instead of going through pages of monetary reports, I merely look at IBD ratings.
I like to use Investor’s Business Daily (IBD found at investors.com) to get a quick overview of the share. The IBD rating covers:
1 – Earnings Per Share (EPS) rating: tells me a stock’s typical short phrase (recent quarters) and long term (last three years) earning growth rate. The number I see is how the organization compares to all other businesses. The scale runs from 1 to 99, 99 being the finest.
2 – Relative Price Strength (RS) Rating: Measures a stock’s relative price tag change within the last 12 months in comparison to all other equities. The scale runs from 1 to 99, 99 being the greatest.
3 – Industry Relative Price tag Rating: Compares a stock’s industry cost action inside the last 6 months to the other 196 industries in IBD’s business list. The scale is from A to E, A being the greatest.
4 – Sales + Profit Margins + ROE (Return on Equity) Rating: Crunches a firm’s sales growth rate during the last 3 quarters, before and after profit margins and return on equity into one letter. The scale is from A to E, A being the greatest.
5 – Accumulation/Distribution rating: Applies a formula of cost and volume changes inside the last 13 weeks to determine if it can be being accumulated or distributed. A = heavy buying, C = Neutral, E = heavy selling.
If you like the idea of including fundamental analysis into your trading plan, consider trading only stocks and shares that meet some minimum requirements – for example A or B, > 70, etc.
I like to use fundamental ratings for longer phrase trades for instance the ones I plan on weekly charts. It’s not really useful if you trade intraday.
Technical Analysis
Fundamental analysis is great to build a list of strong stocks and shares, or as a way to filter out weak stocks and shares, but that’s about it. It does not provide you with an objective method to enter and exit trades. All my buying and selling decisions (entry, exit, and stops) are depending on technical analysis.
Technical analysis is the study of prices. The cost action draws patterns on charts and because human behavior can be repetitive, the cost patterns can also be repetitive.
You can choose from a variety of chart types. The Japanese candlestick charts are by far the greatest and it is the only form you need. There are entire books dedicated to the study of candlestick patterns – if you are serious about studying candlestick charts, look at books written by Steve Nison and and Gregory L. Morris.
– Support and Resistance: The most important concept in technical analysis is Support and Resistance. It forms the foundation for every buying and selling decision and could cover numerous pages but I will limit myself to simplified definitions and a couple examples:
Support level: A price level that a declining market or share failed to penetrate
Example: the low from the previous day forms an area of support and is often used as a stop loss.
Resistance level: A price tag level that a rising market or share failed to break through
Example: a prior high in an uptrend forms an area of resistance and can be used as a minimum objective to take some profits.
Some technical indicators may possibly also provide some support and resistance, for example moving averages, in part maybe mainly because so many traders expect it.
– Oscillators
An oscillator is really a technical indicator that tells you at a glance whether or not a market or even a share currently trades in an “overbought” or “oversold” condition. Some traders use oscillators to forecast a change of direction. Some examples include the RSI, Stochastic Oscillator, and MACD.
There are hundreds of oscillators and technical indicators. I personally look at them to filter out some stocks and shares if I have too many good ones to choose from. I never use them as a signal to open or close a trade.
– Public Sentiment
I look for support and resistance on the VIX (Volatility Index) daily chart to anticipate reversals.
I look in the Put/Call Ratio (5 MA and 10 MA) on the daily chart to see if traders are too bearish (MAs > 0.8) or too bullish (MAs < 0.5)
(MA = Moving Typical)
– Market internals to see if the market is overbought or oversold
I look in the TRIN (5 MA and 10 MA) on the daily chart – overbought (MAs < 0.8) or oversold (MAs > 1.2)
I look at the McClellan Oscillator – the market is overbought if it rises above +70 and oversold if drops below -70. A purchase signal is generated if it falls into the oversold area (-70 to -100) and then turns up – a sell signal is generated if it rises into the overbought area (+70 to +100) and then turns down. If it goes beyond the -100/+100 levels then it may possibly be a sign of continuation from the current trend.
– Market and Industries
I like to purchase stocks from industries in a strong uptrend and short stocks and shares from industries in a downtrend. I also consider the direction from the business for your day (positive or negative)
Putting it all together
This article is not about teaching you how to develop an edge but hopefully it shows you that there are several different tools that can be used to improve your odds. It takes time to find a combination that fits your personality. It takes time to find what works for you.
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