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Commodity trading, such as oil and gold, is different from stocks or forex, and it is considered risky because it is affected by unexpected events such as pandemics or natural disasters, which can affect supply and demand.
After you’ve learned what can impact the commodities (as we mentioned in lesson 2), we will continue learning how prices move on the commodities price chart in lesson 3.
To read the commodity price chart, whether gold or oil, traders need to understand candlestick chart patterns, market structure, support, and resistance, as they are a part of technical analysis.
A candlestick chart is a technical tool traders use to predict the price direction. It represents the market's opening, closing, high, and low prices for a daily candlestick. Traders use this to understand the price battle between buyers and sellers in the market.
Some Traders look for candlestick patterns such as Hammer, Shooting Star, Tweezer Top, etc., to see the market direction and confirm their technical analysis
Source: TradingView
Let’s look at a real chart on TradingView: A bullish engulfing pattern appears, confirming a potential upside reversal. While a bearish engulfing pattern appears above the trend, it confirms a potential downside reversal.
The market structure helps traders see the market movements in three primary types: bullish (uptrend), bearish (downtrend), and sideways. Also, the market structure is an important tool that will help traders identify potential support and resistance levels.
Source: Micro WTI Crude Oil Futures, 15M; TradingView
A bullish structure forms a higher high (HH) and a higher low (HL), indicating that buyers are now dominant in the market, as shown in the Crude Oil Futures price chart at the 15-minute timeframe.
Source: Micro WTI Crude Oil Futures, 5M; TradingView
A bearish structure forms lower highs (LH) and lower lows (LL); it indicates that sellers are dominant in the market, as seen on the oil price chart at the 5-minute timeframe above.
Sideways movement usually within a range, as shown in the Crude oil futures at a 15-minute timeframe. This means prices fluctuate due to the forces between buyers and sellers.
Support and resistance key levels act as a supply-and-demand zone in technical analysis, helping traders spot breakouts and pullbacks to identify entry opportunities. It is one of the most important tools that help traders see buying or selling pressure in past market behavior to anticipate future market behavior.
The support area is where buying pressure is trying to overcome selling pressure.
The resistance area is where the selling pressure is trying to overcome the buying pressure.
Source: Micro WTI Crude Oil Futures, daily; TradingView
To identify the resistance level, find the area where price often moves up to touch the same level multiple times, as seen in Micro WTI Crude Oil Futures on the daily time frame. Price touched the same levels but couldn’t break above it four times, which is considered a strong resistance level.
Support key levels act as a floor where the price falls multiple times. As we see from the Crude Oil Futures on a daily time frame, the price has broken the support level on the third round, indicating weak support or stronger selling pressure.
Price action and market structure can help traders understand the price behavior and market direction. However, some traders need tools to confirm market changes, such as technical indicators.
According to Vantage Market, the most used technical indicators are the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands. See more details below:
Source: Gold Futures, 1D; TradingView
RSI represents overbought or oversold conditions in the gold futures market by comparing the recent gains to the recent losses.
When RSI is above 70, the market is overbought, confirming a reversal.
When RSI is below 30, it indicates the market is oversold, suggesting a reversal.
Source: Gold Futures, 1D; Trading View
These indicators help confirm the momentum and market direction, such as an uptrend or downtrend. It suits traders who have experience with the Moving Average indicator, as it can be complex for beginners.
MACD has two signal lines: the MACD line is calculated by EMA 12 days and EMA 26 days, while the signal line is calculated by an EMA 9 days average of the MACD line.
When the MACD line crosses above the signal lines, it indicates an uptrend confirmation. This shows that the buying pressure has increased.
When the MACD line crosses below the signal line, it signals a downtrend. This means the selling pressure has increased.
This Bollinger Band measures the market volatility and helps traders identify overbought and oversold.
The Bollinger Band includes the middle band, which is a simple moving average that helps traders predict the future market trend, the upper band, and the lower band reflect market volatility.
When the band widens, it means the market is highly volatile.
A narrower band distance indicates lower market volatility.
Combining the time frames provides a better market view of market trends, chart patterns, and potential reversals. Dr. Alexander Elder popularized this method since the 1980s.
Traders can start analyzing the chart at Monthly, Daily, Weekly, Hourly, and Minute levels based on their own trading styles, such as:
Swing traders usually focus on the daily chart as the higher timeframe to define their short-term trend
Day traders usually use 15 minutes as their primary time frame to identify a 5-minute trend.
Long-term traders focus on the weekly time frame or the monthly chart to identify their primary timeframe for entry and exit opportunities.
However, the most used top-down analysis system is as follows:
Step 1: Start to identify the major trend to find key levels, such as support and resistance, at a higher time frame, such as a weekly or daily time frame.
Step 2: Use middle timeframes, such as 4 hours and 1 hour, to confirm the trend structure and set up a trade.
Step 3: Identify entry and exit opportunities at lower timeframes, such as 15 and 5 minutes.
Technical analysis helps traders understand price behavior and market trends to identify entry and exit opportunities.
Candlestick patterns created by one or more candlesticks are used to identify market trends, reversals, or continuations.
Market structure helps traders see the market direction and potential support and resistance levels.
Our easy-to-use glossary breaks down complex trading terms into plain English. Learn the key terms every trader needs to know.
