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Safex Scenarios with Susari
SUSARI GELDENHUYS
INTRODUCTION South African grain prices are known for being very volatile due to uncertainty about what the future may hold for the grain market . Future stock levels , imports , hectares planted and yields are but a few of the factors which create uncertainty ( and therefore price volatility ) in the market . The recent change of the old season with low stock levels to the new season with more favourable production expectations , is proof thereof . These volatile conditions make it very difficult for market participants to make good hedging and investment decisions . However , there are two general aids in the form of fundamental analysis and technical analysis which will contribute to a higher probability of success when such decisions are considered .
Fundamental analysis and the basis of technical analysis were discussed in previous articles . The previous few articles focused on the utilisation of various instruments in technical analysis in order to make certain decisions .
As a rule of thumb , technical indicators can be interpreted more accurately when used in conjunction with the interpretation of trading volumes and open interest as indicators . The article below focuses on the utilisation of volume as a technical instrument .
VOLUME Volume is regarded as one of the oldest and most used technical indicator in modern technical analysis . Despite the simplicity of the indicator , volume is one of the best instruments to capture buying and selling activities in the market . Volume can be defined as the quantity of a specific financial instrument which trades during a specified period . It therefore reflects the interest of market participants over a certain period of time . There are mainly three ways of interpreting volume , namely the strength of the trend , price reversal and price level breakout .
i ) Strength of trend When prices form a primary trend ( either downwards or upwards ), the strength of the trend is usually confirmed by an upward trend in volume . The same applies in respect of countertrend price movements within the primary trend , where volumes are inclined to decrease and therefore reflect a continuation of the primary trend . A larger difference in volumes during the primary trend and countertrend indicate a stronger primary trend . The relationship between a strong downward trend and increased volumes is indicated graphically in Graph 1 .
ii ) Price reversal Due to various reasons ( technical and fundamental ), trends cannot continue for unlimited periods of time . However , timing the reversal of a strong trend is important since it could have costly results if the reversal is identified incorrectly . With the assistance of volume ( in conjunction with various other technical indicators 1 ), the reversal can be determined fairly accurate . As a rule , volume will decrease significantly at the end of a strong trend as market participants lose interest ( irrespective of the reason ), after which the
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AUG / SEP 2017 • SENWES Scenario
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Technical indicators which can be used to determine a trend change , were discussed in previous articles ..