In all futures trading, decisions are made in two ways – fundamental or technical, although many traders use a combination of both.
Fundamental analysis includes all factors that influence supply and demand. For the commodities markets, fundamental factors include weather and geopolitical events in producing countries—outside forces that influence price action. In financial futures trading, factors such as Federal Reserve actions and economic reports are among fundamental forces affecting prices.
Technical analysis is based strictly on inside market forces. It involves tracking various price patterns that occurred in the markets in the past. Analysts focus on a variety of time frames, and commodity trading decisions are based on past tendencies with the idea these price patterns tend to repeat themselves. Technical analysis involves a wide range of techniques, and a variety of market indicators are studied including volume, open interest, momentum and tools such as the MACD. Each individual analyst has his favorite approach – technical analysis is just as much art as it is science.