Reading the Tea Leaves: Technical Indicators for Futures Traders

Every picture tells a story, and in futures trading that adage holds true when traders seek clarity in the wide array of graphically based technical indicators.

Over the longer term, futures traders should look at the fundamentals before buying a commodity, and that involves research into financial data, supply and demand, and the overall economy.

Technical indicators, captured in the price charts, help traders make buy and sell decisions in the short term, using a range of criteria. For example, a trader can call up a chart for crude oil and overlay the technical indicators, typically by using a side menu. Technical indicators can be complex, so it may be wise to talk to your broker to discuss various price points before you take the plunge, or liquidate a position.

Moving Average Indicators

The most popular tools in futures trading are the momentum indicators, led by the accessible Moving Average, or MA. Though it’s a lagging indicator, MA helps traders look beyond the peaks and valleys of a price chart, which is often a jagged line, to see how prices are moving over a smooth line, within a defined period.

Using an MA tool, a trader might turn bullish when the price of a commodity rises above the moving average, say over 40 days, and when the average line itself is also on the ascent. But it all turns bearish when the price of the instrument dips below a downward sloping moving average. A steep MA also shows momentum, while a flattening of the line is like a warning signal flashing on your dashboard: Your investment vehicle is running out of gas.

Like craft beer, MA indicators come in many different iterations to suit a variety of tastes, including the Exponential Moving Average, Volume Adjusted Moving Average, and the Linear Weighted Moving Average.

As an example of how the other moving averages differ from the traditional MA, the Exponential Moving Average, or EMA, gives more weight to the latest data. It tends to be more dynamic or sensitive to the most recent price changes.

Some traders also use a complex technical tool known as Moving Average Convergence Divergence, popularly known as “Mac-Dee”. This indicator can show the direction, strength, and momentum of an instrument by combining multiple averages.

Characteristically, the MACD main line is made up of 12-day EMA minus 26-day EMA. The second line is called the signal line, which is made up of 9-day EMA. It’s an indicator that requires further study, but it can be useful in generating buy or sell signals.

Relative Strength Index

The RSI, or Relative Strength Index, is another crowd-pleaser in the futures world. This indicator is designed to give traders a view of the momentum behind a price move, using a scale from zero to 100. Basically, traders need to watch two zones. If your investment darling is above 70, then it is overbought. If it’s below 30, then it is in oversold — in order words, “hey, we might have a bargain here.”

The Bollinger Band Line

Some traders also like to monitor the Bollinger Band Line because they have found that its bands are a good way to capture market trends. The center line covers the trend, the upper line is the resistance, and lower line shows support for the instrument. When the price is volatile, the bands expand on the chart, but narrow when there is a contraction.

Gaining Clarity and Confidence

To sum up, there is no crystal ball for futures trading, but you may get much more clarity — and confidence — in your trading decisions by employing the tried-and-tested graphical imagery that the industry’s technical indicators provide.