Short Term Futures Traders Should Look at the Grain Markets

This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Thursday, January 23, 2014.

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If you are a short term futures trading who is looking for new markets to trade, take a look at the grain markets. They are liquid and at the right time they can move a good amount in a short time- which can make for good trade opportunities. Plus, with two separate sessions in the trading day and the relatively late open of the day session you don’t have to watch it around the clock.

For today, both the soybeans and the soymeal futures had breakout setups as both had an NR7 pattern on Wednesday- one of my favorite signals to anticipate a sharp move could be anticipated. Also, the soymeal futures were on the Sell day of the Taylor Trading Technique cycle; this tells us to anticipate upside follow through from the previous TTT Buy day rally.

During the night session, the March soymeal futures rallied a bit. They pushed above Wednesday’s high of 491.80 (the standard reference price for an upside breakout) and made a session high of 421.30. At the trade suspension it stopped at 421.10, above the previous session high.

In a trading session where a market has a breakout setup, just because the market has already triggered the initial trade entry (in this case, trading above the previous day high) that doesn’t mean that there won’t be additional trade opportunities in that session. We don’t know how far the market will move beforehand, especially on a day with a breakout move.

On breakout trade days, the key to additional trade entries is the same as any other day- we take trades when we have confirmation that the market is making the move we anticipated. On a breakout day that means we want to enter on impulse moves; when the market is making a move in the direction of the breakout.

For today’s soymeal trade that meant we wanted confirmation of upside momentum to go long. For the day session for March soymeal that meant we would look to go long when the market traded above the overnight high of 421.30- a new high being our signal that the rally was resuming.

At the 8:30 open the market opened at 421.00 (below our trigger price), rallied above it, dipped below and then went back up a second time on the way to higher prices. Either of these moves was a trigger for a long entry; the second move up gave an opportunity for a more conservative entry (I often don’t like to take an entry in the first minutes of a session, to avoid whipsaws.)

The initial stop loss for this trade could have been placed either below the day session low of 420.40 or below Wednesday’s high of 419.80. Either way, the setup allowed us a tight stop and small risk for our trade.

As I said earlier, it’s difficult (maybe impossible) to know how far a market will move ahead of time. With today’s meal trade, I didn’t list any rally objectives for this reason. It’s also why I encourage traders to think for themselves, this makes for better trade management.

Getting back to trade objectives, 427.00 was a 50% retracement of the selloff from last week’s high to Wednesday’s low. I look at 50% retracements as a reference price for market moves. In this case, if the market was able to maintain a move above the 50% level we would look to stay long in anticipation of the market eventually rallying to the starting point. On the other hand, failure to clear the 50% level would be a signal that the rally was failing, telling us to take our profits.

By about 9:10 AM the market had rallied to a session high of 427.30 before backing off. About 10 minutes later it made a second push above 427.00 but it made a lower high. If you were still in the trade, this lower high was a signal to close the trade and take profits.

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