Futures | October 4, 2017

Technical Analysis in Futures Trading

One needn’t be a futures expert to realize the significant role that technical analysis plays in these markets – the belief that the key to determining future market moves lies in a market’s historic statistical activity such as price or volume rather than the inherent traits of the underlying commodity itself. Even traders who focus on fundamental factors like crop reports and geopolitical events tend to incorporate some element of technical analysis into their decision-making.

What may initially strike a novice as little more than a bizarre science of lines and graphs better suited to obsessive market gurus and geometry professors is, in many cases, a technique that may benefit traders of varying skill levels. Many industry veterans tend to believe that trading based at least in part on the established statistical movement of some markets can spare a trader from not only the emotional swings of trading with one’s heart instead of one’s head, but the confusion of trying to weed through an often murky fundamental picture as well.

When beginning to look at technical analysis, it’s important to remember that each futures market has its own trading personality, and that a combination of charting strategies is often needed to identify and confirm trading opportunities with accuracy and confidence. Still, while every trader has his or her own preferred studies and methods, four common indicators generally constitute the basic building blocks of most technical analysis.

Moving Average Convergence/Divergence (MACD)

MACD is used to measure short-term momentum. MACD tends to be one of the earliest generators of buy and sell signals, providing an early tip-off of flagging momentum in a given market trend. MACD is calculated by taking the difference between two exponential moving averages, typically the 26-day and 12-day moving averages.

One common way that traders use MACD is to buy or sell a futures contract when it crosses the signal line, or zero (sell when MACD falls below the signal line, or buy when it climbs above the signal line). MACD can also be used to identify an overbought or oversold market. When the shorter moving average moves significantly away from the longer moving average (i.e., the MACD rises), it suggests that current movement in a particular direction may begin to wane and might soon return to more realistic levels. MACD divergences from the trend of the futures price may also signal a trend reversal.

MACD example

MACD example

Relative Strength Index (RSI)

RSI is used to measure the velocity of directional movement, but it does not, as its name might suggest, compare the relative strength of different futures markets. Instead, this indicator measures the internal strength of a single futures contract, plotting a value from 0 to 100. RSI above 70 is generally considered overbought and indicates a sell signal, while a level below 30 is widely considered oversold and implies a buy. Some traders use RSI to identify the long-term trend and use extreme readings for entry/exit points. If the long-term trend is bearish, for example, overbought readings could represent potential points at which to establish or add to short positions.

Another common method of analyzing RSI is to look for divergences between the underlying futures market and its RSI. For example, if the futures contract is rallying to a new high, but the RSI fails to surpass its previous high, the possibility of a false breakout and an impending price reversal should be considered.

RSI example

RSI example


The stochastic indicator can help identify whether bulls (uptrend line) or bears (downtrend line) are in control of a particular market. Stochastics can point out short-term price fluctuations to help determine whether the current price level is sustainable or on the verge of reversing course.

Oscillators like stochastics can help to pinpoint entry or exit points by signaling potential turning points in price, as well as indicate a broader, more significant upturn or downturn in the trend.

Using a scale of 0 to 100, the most common way to analyze stochastics is to sell when the reading is above 80, suggesting overbought conditions, and to buy when the reading is below 20, which may imply an oversold market. The direction of the stochastics should confirm price movement (i.e. rising stochastics confirm a rising futures price).

Divergence occurs when the stochastic values are moving in one direction and the futures price is moving in the opposite direction, which could imply a turning point in the market, such as where prices are making a series of new highs and the stochastic indicator is failing to surpass its previous highs. For example, a false breakout may be afoot if a new high in price is reached without a new high in stochastics.

Stochastics example

Stochastics example

Bollinger Bands® 

Bollinger bands behave similarly to moving averages and are plotted at two standard deviations above or below the moving average, typically using either the simple moving average or an exponential moving average to increase the sensitivity of the indicator. Bollinger bands not only help to identify relative price levels and volatility, they can also be combined with price action and other indicators to generate signals and to act as a precursor to significant moves.

Traders often use Bollinger bands to detect extreme unsustainable price moves, capture changes in trend, target support and resistance levels, and spot contractions or expansions in volatility. Some traders believe that when prices break above or below an upper or lower band, it is an indication that a breakout is occurring and will then take a position in the direction of the breakout.

Others use Bollinger bands as an indicator of overbought and oversold conditions. For example, when a price touches the top of the band, traders assume that the futures contract is overbought and will sell futures, believing it will ultimately revert back to mean, or the middle moving average band. Conversely, if the price touches the bottom of the band, traders figure that the market is oversold and will rally back towards the top of the band and will, thus buy futures. The spacing or width of the band is dependent on the volatility of the prices – higher volatility is typically characterized by a wider band, while lower volatility often results in a narrower band.

Bollinger Bands example

Bollinger Bands example

Technical Support

These four indicators barely scratch the surface of the full breadth of technical analysis that can be used to analyze the futures markets. But using these as a good foundation, continued exposure is often the most effective means of familiarizing oneself with the nuances of this analytical discipline. Futures traders will find plenty to satisfy their technical appetites at Schwab.

Technically Speaking


Want to learn more about trading futures at Schwab? Call the Schwab concierge team at 877-903-7544.