Using Expectancy as a Technical Analysis Tool

July 10, 2009 by  
Filed under Commodities Trading

Commodities trading tools are absolutely necessary to employ and achieve profitable results in this type of market. Fundamental analysis considers weather predictions, crop yields, new mines or production areas and new technology pertinent to a specific commodity – basically, any factor affecting the supply or demand in commodities trading.

Technical analysis actually employs complex mathematical calculations to determine trends via charting identifiers such as price, volume and daily activity. Recent market activity is given the most weight in this type of analysis, resulting in a more applicable set of information to today’s market.

Of course, in the world of commodity trading any type of prediction is only certain to a limited degree. We can calculate probabilities, but not without unknown variables and the sometimes improbable result. Expectancy is one variable used in technical analysis that is both simple to calculate and utilize in your daily trading activities.

The formula for expectancy is that: Expectancy = (probability of win x average win) – (probability of loss x average loss). If you profited in 20% of your trades last year and averaged a 10% profit in these commodity trades, your losses averaged 3% and you invested $10,000, then your average profit is 0.10 x 10k = $1k, and your average loss is 0.03 x 10 k = $300. Therefore, your expectancy = (0.2 x 1k) – (0.8 x $300) = $200 – $240 = $-40. This perhaps wasn’t the best result an investor could hope for, but the calculation will help to measure the effectiveness and result of any newly employed tools or strategies in the future.

The calculation of expectancy shows that the number of times an investor is profitable is not what really matters in long-term investing. You only need to profit once in order to see a net profit, and this is the number you want to see gradually improve over time.

Even if you use a commodity broker, you can track his progress using this method. After all, it is your money he’s playing with, so you might as well keep an eye on its progress.

When comparing investment strategies between stocks & commodities, there are several differences to consider. Stocks are generally bought and held as a long-term investment to reap the benefits of a growing company that is increasing in value.

Commodities trading, however, typically involves holding on a short-term basis, and can lend to better results for even the most novice of traders. Day traders in the stock market are typically looked down upon, but this practice is expected in the commodities market.

Don’t forget to utilize all of the tools and analyses available when making your predictions about the future prices of commodities. Buying and selling futures contracts can be very exciting and profitable, but can also become a detriment if you don’t do your homework first. Ask your commodity broker or search for online commodity trading tools to help you in your quest for more information and education about investing in commodities.