Spread Trading Solutions

In our last discussion, we have comprehended the notion of 'Trend Following Systems: Commodity Trading', and now, we will move ahead to analyze the 'Indicators'.

Analysis doesn't simply mean investigation of the component parts of a whole and their relations in making up the trade. But, we herein restrict to ourselves the concept of 'technical indicators'. This will in turn be useful for the traders to have a clear idea on how to use this technique and get success in their trade.

First, let us highlight the leading and lagging indicators in trend following systems. What are these?

Leading indicators ' These are meant for predicting the future markets. The functioning of a traffic red light can be compared to these in the financial markets. Bonds are believed to be a good leading indicator of the stock market. Though they are not perfect in that respect, traders contemplated and foresaw trends with that in the economy.

Lagging indicators ' These indicators follow events of the markets and simply serve as confirmations in the trade about patterns occurring or about to occur. In the lagging indicators, unemployment plays a leading role and it is conceived as the sign for poor economy.

A formula is applied to the price data of a security to arrive at data points in trend following systems. This technical indicator is a series of data points. Price data implies a coordinated sequence of prices of the market which are open or closed, high or low, over a period of time.

Closing prices are only considered by some. Some consider volume and open interest in their formulations. By entering price data in the formula, a data point can be estimated. An example for such data point is the closing of 3 prices. Hence, one data point can't simply b relied upon. For an effectual result in trend following systems; series of data points over periods of time are indispensable.

This effectual result will aid the traders to compare the markets between the present and the past levels. Trading companies will depict these results above or below a security's price chart of their graphical forms.

With such forms of characterization, traders who use trend following systems can compare the corresponding price chart of the security. Some companies plot these results on the top of the price plot for an easy view.

Again, these systems help the traders to analyze a different perspective of the price action in the market. Moving averages can also be derived by simple formulas applied by the traders.

The net gain for the traders who use trend following systems are that these trend following systems give unique view on the strength and direction of price move in the market, even though the formula is a complex one.

This price move will be an indicator for the trader who computes the average price of a security which is on an assigned number of periods. During volatile market seasons, this will be of immense help to traders to smooth their data.