When it comes to futures trading and especially those who wish to trade intraday, fundamental analysis of a particular stock may not hold much importance. You want to make quick profits due to price volatility and exit your positions. It is only when you wish to hold on to a position for some time that some aspects of fundamental analysis come into play and even that is quite limited.
Technical analysis in futures trading involves mainly three elements – the price of the asset class, the volume traded and the open interest positions that have been created. The analyst looks at these in order to form an opinion on the likely movement of the asset class in the short term.
You would have noticed that four price points are mentioned in the papers relating to an asset class. The price at which a futures contract opened, the high it made during the day, the lowest point as well as the closing price. Of these four, it is the closing price that is considered significant as that sums up the activity for that stock for the day. The opening rates are not seen to be as important mainly due to the buildup of contracts from the previous day and that is seen to influence the opening prices.
Generally, when the price increases with volumes, the indication is that particular contract is in favor and therefore one can have a bullish view on it. The increase in open interest is also another indication that more buyers want to buy the contract and you can therefore get in as quickly as possible to make your profit from the leveraged position you can take.
It is important to mention here that technical analysis does not always mean that you can be certain of the movements of the contracts. It can be used to establish probabilities and you should not confuse it with a particular trend that is sure to happen.
The technical analyst looks at the trendlines that have been established over time for a particular stock to determine the probability of the stock behaving in a specific manner. These trendlines serve as a warning and if specific points in the trendlines are broken, that stock would be able to continue with the momentum in all probability.
For instance, when a stock makes a new high, it means that it is likely to continue the trend with each high it makes being higher than the previous high. The same goes for stocks making a series of lower lows. You can be reasonably sure that this stock will hit new lows in the short term.
Other elements that a technical analyst looks at in futures trading are support levels and resistance points.