Managing the Margin: Using Technical Indicators in Agricultural Marketing Plans
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Managing the Margin: Using Technical Indicators in Agricultural Marketing Plans

[music] Hello, I’m Jack Davis, SDSU Extension Crops Business Management Field Specialist. Today we are talking about using technical indicators in agriculture marketing plans. Technical signals can be incorporated into agriculture marketing plans to identify decision points. There are many types of technical signals that can be utilized. Technical signals can be calculated based on historical price and volume data, with the aim to forecast future price probability. Technical signals can be utilized on their own or coupled with fundamental indicators in a marketing plan. There are four types of technical indicators, they include trend momentum, volume, and volatility. But are technical signals reliable enough to generate profits? The academic research examining technical signal performance has shown mixed results, using technical signals relies on the assumption that prices follow trends and history repeats itself, and that all market information is incorporated into the market price. However using the technical signals to develop rules for selling can help take out some of the emotion out of marketing decisions and provide more confidence in making decisions when decision point occur. A producer should utilize technical signals that they are familiar with and understand the calculations and what statistics the technical indicator is based on. A producer may want to choose multiple technical indicators of different types when developing a marketing plan. For example, a producer could utilize a trend signal, such as a mac D, a momentum signal, stochastic oscillator, and a volatility signal, a Bollinger Band, to form a selling rule to execute when all three give a sell signal at the same time. Technical signals can be used to monitor futures and cash prices for hedging or selling opportunities. An example of a technical signal used to make marketing decisions is a Bollinger Band. The middle Bollinger band is made up of a moving day average with some specified days to calculate the moving average. Typically a twenty day moving average is used, the upper and lower bands are the standard deviations from the middle moving average. One standard deviation, plus or minus, from the moving average, assuming a normal distribution. It contains 66 percent of the expected prices. Two standard deviations consist of 95 percent of the expected prices and so forth. The number of standard deviations to set your Bollinger Bands, follow the Bollinger Band technical signal can vary, but the typical setting is two standard deviations. Once the standard deviations are set and the Bollinger Bands are plotted on a price chart, the distance between the bands will vary on the chart. This band variation indicates changes in the level of volatility in the market during the period the statistic is being calculated, say for the last 20 days. When their is greater distance between the upper and lower bands, there is greater volatility during the period. While a narrower distance between the upper and lower bands indicated lower volatility. A hedging selling rule that could be utilized using the Bollinger Band is when the current price closes above the upper Bollinger Band. When the price crosses about the upper Bollinger Band, the suggestion is that the market is experiencing abnormal volatility, even when controlling for changes in the price trend. As a result there is greater probability that the market will return back towards the moving average than the probability that the market will continue to experience abnormal volatility by staying above the upper Bollinger Band. Its important to reemphasize that the default setting for using the Bollinger Band is a 20 day moving average with two standard deviations. These setting can be altered to potentially improve prices received. The standard deviation can be increased so fewer signals would potentially occur, but it could improve the price received because the bands are set at wider intervals with lower amounts of probability that the price will cross above the line. However likewise as the bands are placed in wider intervals, there is an increasing probability that a signal may not be triggered. On the other hand the standard deviation setting could be decreased to increase the likely-hood that the technical signal will trigger more signals but may result in a lower price received. The setting of the Bollinger Band should be made considering the risk tolerance of the producer, since a higher standard deviation may create more risk that the threshold on the upper band is not broken but could result in a higher expected return when it does. Here we have the classic risk versus return trade off in setting the Bollinger Band signal utilizing multiple technical indicators to create a rule based hedging selling marketing plan coupled with fundamentals can provide confidence in a disciplined approach to marketing. For more information on this topic, visit [music]

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