Technical analysis with stocks and futures

Most traders ask themselves whether there is any difference between technical analysis applied to stocks and technical analysis applied to futures. The answer is: Yes and no. While the basics of technical analysis remain the same independently of the form of asset it is applied to, there are some significant differences any trader should know in order to be successful at any market.

Originally, technical analysis was developed to predict price movements in stocks. Later, those principles were adapted to futures. The essential tools are therefore the same. You can use candlestick formations, technical indicators, trend analysis, and so on with both stocks and futures. If you know how to apply these tools to either stocks or futures, you can easily adapt them to the other side.

However, futures and stocks are different types of assets with some unique features. Therefore, they have to be handled differently in certain areas.

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Differences between technical analysis with stocks and futures

The most significant difference between technical analysis with stocks and futures lies in the preferred instruments to predict price movements. Although most tools of technical analysis can be used in stocks and futures, they are usually not used in the same way.

For example, chart patterns in commodity trading tend to form less fully as in stocks. Therefore, future traders rely heavily on short term indicators. While using a 200-day moving average can make a lot of sense with stocks, in futures this is a far too long time frame to create valid predictions. You will create better signals with a 14-day moving average, for example.

What’s more, technical analysts of stocks rely heavily on indicators of market sentiment and contrary opinion. Market sentiment indicators try to find out what certain important groups are currently doing, for example banks, mutual funds, and floor traders. Contrary opinion indicators measure the entire market’s bullishness or bearishness, assume that the majority of traders are usually wrong, and predict the exact opposite. According to this theory, if most traders expect rising prices, falling prices are more likely to happen. Future markets, however, are driven by more economical reasons, which is why contrary opinion and market sentiment tools are less suited for future markets.

With future markets, these instruments are far less useful. Technical analysts of commodities and currencies therefore rely on a purer form of technical analysis: Trend analysis, candlestick formations, and classic technical indicators like the moving average and the RSI.

When applying fundamental analysis to stocks, flow of funds analysis is used to determine whether money is currently moving in or out of a stock. Some traders assume that the more funds are currently available to banks, mutual funds, and other big investors, the more money is likely to flow into the market, and the higher is the potential for rising prices. This theory does not apply to futures, as there are no investors that necessarily need to invest their free money in this commodity or this currency.

Additionally, stock traders can compare a single stock to the average performance of the stock’s entire market or, more specifically, to the company’s direct competitors. For futures, there is no such possibility to compare signals. Oil, gold, and the Dollar are in a group of their own and cannot be compared with other assets.

As a trader, you have to know and understand these differences. Above all, you have to be aware of them when you try your trading strategy with a new type of asset. If your strategy creates good profits with stock but falls short with currencies, this might be due to the different nature of these assets. Confronted with a situation like this, an experienced trader could either adapt his strategy, or stop trading the strategy with currencies.