If you want to become a successful oil trader, you have to know how to analyze the charts. By looking at historical patterns, traders make predictions about the future direction of the chart. There are several popular technical indicators that help you with this analysis, and that will help you identify buy and sell signals.
The momentum indicator compares the current oil price with that of several periods ago, usually ten. It results in the absolute difference between the two prices, and provides limited information. By calculating the rate of change, the information becomes more valuable. The rate of change is the momentum, divided by the price of several periods ago. The resulting number indicates a signal to buy or sell oil futures. Whenever the indicator crosses the zero level, this might indicate a bottom or top, and you can setup a trade to benefit from that.
The Elliot Wave Principle is based on the assumption that markets move in a certain pattern. The Elliot Wave is a pattern with five waves, with wave 1, 3, and 5 being upwards and wave 2 and 4 downwards. By recognizing these waves you will be able to identify the current state of the oil trading market, and predict to waves to come.
Another popular technical indicator for oil traders is the Fibonacci analysis. This tool is based on the natural number sequence discovered by Leonardo Pisan. Every number in the sequence is the result of adding up the previous two numbers. The Fibonacci numbers can be converted into ratios that seem to be important reversal signals in the oil charts. Whenever the chart crosses some important Fibonacci ratio, this could indicate a buy or a sell signal.
The relative strength index is another popular tool used by oil traders. The indicator compares the strength of the upward closes to the downward closes. It is an important tool to identify overbought or oversold situation. Especially in the extremely volatile oil trading market, overbought and oversold situations are very common. Speculation can move prices to levels that lack a fundamental basis, situation where the market is waiting for a correction. By using the relative strength indicator to spot overbought and oversold situation, oil traders can predict corrections and trade accordingly.
The four technical indicators mentioned in this article can help you with your trading decisions. Important to keep in mind that none of these are failure proof, and in the end markets are driven by fundamentals. Technical analysis is an important aspect of trading however, and every trader will need to keep an eye on the signals they can provide.
Peter Rogers is a content writer for TradeCrudeOil.net, the largest online community for oil traders. The portal is completely devoted to the oil trading market, with free analysis, the latest news, and a traders forum to exchange trade experience.
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