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The “Chart Construction For Trading Commodities" article examines and elaborates upon the construction, benefits and advantages that different types of charts offer to investors in the commodities and futures markets and their significance in helping individuals identify profitable trading signals.
The daily bar chart is generally recognized as the most utilized type of chart in commodity futures trading. Each day's movement is expressed as a vertical bar. Each one of these lines shows the high, low, open and close for each day in the given time period. The short dash on the right of the vertical line represents the closing price, while the short dash to left of the vertical line signifies the opening price.
Another type of chart used by technical analysts is also known as the point and figure chart. This chart consist of alternating columns of x's and o's. X's represent rising prices. O's represent falling prices. The data is more compressed in this type of chart and it is generally felt that buy and sell signals are more easily discernible.
Finding the ideal commodities chart construction
Chart construction is easy. Charts are available everywhere on the Internet. Numerous software programs exist, allowing the investor to construct unique formations.
Charts can be constructed for any time period. Some charts even show activity on a trade by trade, that is, a tick by tick basis. When doing longer trend analysis, it is preferable to utilize weekly or monthly bar charts. The only real difference for the longer-term charts is that the vertical bars represent a weekly or monthly timeframe.
Reading the particulars of bar charts
The vertical axis on a commodities chart represents the price of the commodity, while the horizontal axis shows the timeframe involved. The vertical bars graphically represent the price movement for each individual time period. A blank space in a time chart signifies that there was no trading at that particular time.
In addition to price movements, bar charts provide important information on volume and open interest. Volume is depicted as a bar at the bottom of the chart under the day's price bar. The higher the bar signifies the higher the volume for that particular day. The lower the bar means smaller volume. Along the bottom of the chart is also a solid line representing the open interest over that time. Open interest represents the total number of outstanding contracts for the particular futures market in question. It should be pointed out that open interest represents the total amount of contracts held by individual investors who are either long or short. As a futures trade is a zero-sum transaction, no one can have a long position without a counterpart holding a short position.
Individual opening interest numbers, in and of themselves, do not provide any information as to future price movements. Their importance relies in the fact that they measure the depth and liquidity of the market. It is always safer to trade futures contracts with the highest open interest. Delivery months with low open interest should be avoided.
It should be kept in mind that charts are a historical record of data. In and of themselves, they are of little worth. With the knowledge obtained herein on their formation, an individual can now begin to learn the techniques for their interpretation. Charts can be utilized as an indispensable tool in the art of price forecasting for futures and commodities markets, once the methods of their interpretation have been mastered.
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