Ask Colin

Do you think that technical analysis and trends are as valid for trading commodities as they are for trading stocks?

This question can be addressed on several levels.


Firstly, I believe that any freely traded market, for which accurate and complete price information is available, is susceptible to analysis by technical analysis. The reason is a basic one. The price data reflects the actions of humans as they trade. So long as there is a free market, people will tend to react in predictable ways when placed under the same stresses. The same patterns will tend to form on the charts and have the same implications.


Secondly, commodity markets tend to be highly leveraged and this means that most speculators will have no alternative, but to trade short term rather than hold longer term. That is what the hedgers do. However, while the actions of hedgers are vital, price discovery tends to take place through the action of speculators. This is their role and why they are encouraged to be there. The shorter the term in which we trade, the more important will be technical analysis, which tries to discern changes in the balance of supply and demand in the market. News shocks will also be important, but the charts will often throw a shadow ahead of the news as the smart money gets set or gets out.


Thirdly, technical analysis has always been a factor in commodity markets. In fact there is evidence of it centuries earlier in Japan, than when it came to be used in Wall Street. Also, many of the techniques that we call technical analysis, rather than charting, seem to have been developed for the commodities markets and later utilised in the stock markets. Everyone has been trading stocks in the 1990s and 2000s, but before that futures and commodities were a big game and where the real action was.