What are the best practices for using TA to identify and manage commodity risks?

Commodities are volatile assets that can have a significant impact on the performance and risk profile of businesses and investors. Technical analysis (TA) is a method of analyzing price movements, trends, patterns, and indicators to forecast future price movements and identify trading opportunities. TA can help you to identify and manage commodity risks by providing insights into the supply and demand dynamics, market sentiment, and price momentum of different commodities. In this article, we will discuss some of the best practices for using TA to identify and manage commodity risks.

1 Define your objectives and risk appetite

Before you apply TA to commodity markets, you need to define your objectives and risk appetite. Are you hedging against commodity price fluctuations, speculating on price movements, or diversifying your portfolio? How much risk are you willing to take and what is your time horizon? These questions will help you to select the appropriate commodities, TA tools, and strategies for your goals. For example, if you are hedging against rising oil prices, you might use TA to identify support and resistance levels, trend lines, and moving averages to determine the optimal entry and exit points for your futures or options contracts.

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Rajat K.

Managing Director (Natural Resources) | Strategy | M&A | Consulting & Advisory
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Identifying commodity risks is like playing detective in the market – you need Sherlock Holmes' intuition, Hercule Poirot's attention to detail, and a flair of Vyomkesh Bakshi. It's not just about spotting the obvious suspects; it's about peeling back the layers of market dynamics to uncover the hidden signs that can turn your investment strategy into a suspenseful thriller... or a murder mystery! And the best tools at your disposal are a clear head having identified your end result (objectives) before you take the case (even before you start investing)

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Richard Weissman

Trading, Derivatives, Risk Management, & Technical Analysis I Acclaimed Author I Educator & Speaker
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First, hedgers need to quantify the size of their cash positions as well as the location and quality of those positions vis-à-vis actively traded futures contracts. This allows us to determine which futures contracts have the highest correlation while still enjoying sufficient liquidity to manage basis and liquidity risk. Next, I’d analyze long-term support and resistance levels on monthly charts to develop a risk management strategy that includes percentage hedged, duration of the hedge as well as the derivative instrument used to implement the hedge. Finally, I’d augment this analysis with seasonality as many commodities display fairly consistent seasonal tendencies which can aid hedgers in timing their management of price risk.

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2 Choose the right TA tools and indicators

Commodity traders and analysts have access to a variety of technical analysis (TA) tools and indicators, but not all of them are applicable for every commodity or situation. Thus, it is important to choose the right TA tools and indicators that suit your objectives, risk appetite, and the characteristics of the commodity you are analyzing. For example, if you are trading gold, you might want to use TA tools and indicators that capture the relationship between gold and other assets such as the US dollar, inflation, and interest rates. Common TA tools and indicators for commodity markets include price charts, volume and open interest, oscillators and momentum indicators, and trend-following indicators. Price charts display historical and current price movements of a commodity in different time frames and formats. Volume and open interest measure the level of trading activity and liquidity in a commodity market. Oscillators and momentum indicators measure the speed and direction of the price movement while trend-following indicators help identify the prevailing trend in a commodity market. Utilizing these TA tools and indicators can help you identify trends, patterns, breakouts, reversals, overbought/oversold conditions, divergences, momentum shifts, smooth out price fluctuations, filter out noise in the market, confirm validity of price signals, gauge market sentiment, identify potential turning points or market extremes and follow the prevailing trend in a commodity market.

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3 Apply multiple time frames and perspectives

One of the best practices for using TA to identify and manage commodity risks is to apply multiple time frames and perspectives to your analysis. This means that you should not rely on a single time frame or a single TA tool or indicator to make your trading or hedging decisions. Instead, you should use a combination of different time frames and different TA tools and indicators to get a more comprehensive and balanced view of the commodity market. For example, you might use a long-term time frame, such as a weekly or monthly chart, to identify the major trend and the key support and resistance levels in the commodity market. Then, you might use a medium-term time frame, such as a daily or hourly chart, to identify the minor trend and the optimal entry and exit points for your trades or hedges. Finally, you might use a short-term time frame, such as a 15-minute or 5-minute chart, to fine-tune your timing and execution of your trades or hedges.

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Rajat K.

Managing Director (Natural Resources) | Strategy | M&A | Consulting & Advisory
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Recording commodity markets across a wider time horizon will provide greater insight into price dynamics. Short-term price fluctuations may diverge from long-term trends, and by examining various time frames, traders can develop a comprehensive perspective on market dynamics. The analysis of multiple time frames serves to validate trends. When a trend identified in a shorter time frame corresponds with the trend observed in a longer time frame, it lends credibility to the analysis. This validation contributes to boosting the trader's confidence in discerning the potential direction of commodity prices and allows for a more nuanced, informed, and adaptable approach to trading / investing calls

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4 Test and backtest your TA strategies

Testing and backtesting your TA strategies is an important best practice for using TA to identify and manage commodity risks. This means that you use historical data and simulated scenarios to evaluate the performance and profitability of your TA strategies. Testing and backtesting can help you validate the effectiveness of your TA tools, optimize the parameters and settings, identify the strengths and weaknesses of your strategies, adjust risk management rules, and improve your confidence in your strategies. There are many software and platforms available for testing and backtesting, such as MetaTrader, TradingView, or Excel. It's important to choose one that suits your needs and preferences so that you can use it consistently and objectively.

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5 Monitor and review your TA results

The final best practice for using TA to identify and manage commodity risks is to monitor and review your TA results on a regular basis. This means tracking your trading or hedging outcomes, comparing them with expectations, and analyzing successes and failures. Doing so can help you measure performance and profitability, evaluate risk exposure and return, learn from mistakes, adapt to changing market conditions, and stay focused in your TA journey. To record your TA results, use a trading or hedging journal or log that includes the date, time, commodity, price, volume, open interest, TA tools and indicators, entry and exit points, profit and loss, and comments. Additionally, use charts, graphs, tables, or statistics to visualize and summarize your TA results. Periodically review your TA results - such as weekly, monthly, or quarterly - and use them to adjust or refine strategies and goals.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the best practices for using TA to identify and manage commodity risks?

1

2

3

4

5

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1 Define your objectives and risk appetite

2 Choose the right TA tools and indicators

3 Apply multiple time frames and perspectives

4 Test and backtest your TA strategies

5 Monitor and review your TA results

6 Here’s what else to consider

Technical Analysis

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What are the best practices for using TA to identify and manage commodity risks?

1

2

3

4

5

6

1 Define your objectives and risk appetite

2 Choose the right TA tools and indicators

3 Apply multiple time frames and perspectives

4 Test and backtest your TA strategies

5 Monitor and review your TA results

6 Here’s what else to consider

Technical Analysis

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