How to Read and Analyze Commodities Charts

If you are looking to trade commodities, you will have to become acquainted with reading commodities charts. The chart depicts the story that is unfolding for the selected commodity. There are a myriad of different technical indicators, but it is important to know the fundamentals of chart reading. Three major variables for chart reading are price, volume and open interest. These are the statements of trading activity and can be very eye opening in speculating for profits in the near term.

Much can be said for chart patterns as well as candlestick bars. To get started, however, the basic way to analyze the day's activity is to follow the price bar and trading volume. The open interest is also significant, but it is a one-day lag for speculating in the near term, so it is not a leading indicator.

What Makes Up the Price Bar

The price bar is made up of the open, high, low and closing prices of the trading session. These are prices that are significant levels to look for when trading in any time frame, especially when day trading.

Trading Volume

The amount of trades made in amount of shares or contracts is the trading volume. Looking at trading volume alone will not give a sufficient outlook for speculation, but when coupled with the price activity it gives a significant prognosis of what has transpired and therefore a sufficient tool for speculating on future trends.

Open Interest

Open interest is the amount of outstanding shares or contracts that have yet to be traded, or closed. When open interest is high, that means there will inevitably be high volume at one point or another to close the outstanding contracts, for instance, in trading commodities. The great thing about open interest data is that it adds significantly to trading volume and price data. Therefore, when looking at the three simultaneously in a chart, it will be your greatest start in analyzing charts.

For example, let's say we are looking at a daily price chart, and the price bar is positive in the day's trading session. That means we are above yesterday's closing price. Great, but what if also the volume is higher than yesterday? That means that there is stimulated buying activity, and we can venture to guess that this buying activity will continue until we reach another significant level or news revelation. What's more, if not only the price and volume are higher buy open interest is higher as well, then we can further say that this buying activity has new market entrants. Therefore, our guess that prices will continue higher is a valid premise or speculation.

This example can also work in the other direction for indications of lower price activity. What about when there are conflicting indicators? The beauty of using all three indicators is that we can analyze that chart with greater clarity and interpret the markets better.

This of course takes into account only basic data dimensions of "reading the tape." This type of analysis does not take into account news revelations and fundamental analysis.

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