This originally appeared as a blog post in Scott Hoffman’s Futures Insight Blog on Thursday, March 13, 2014.
The wheat futures had a big rally this week, rising nearly 60 cents / bu. off Tuesday’s low. It’s human nature to look to fade a move like this and the Taylor Trading Technique gave you a disciplined way to play the fade.
By the Taylor Trading Technique (the basis for much of Swing Trader’s Insight), Tuesday was a Buy day. It saw a Buy day pattern, opening on the session low and closing near the high. Wednesday was a Sell day, seeing upside follow through. According to the TTT that meant we should look for a Sell Short day on Thursday, which would show a momentum reversal down and a selloff.
Last night, a Sell Short day move for the wheat looked unlikely as the rally continued. The TTT tells us to anticipate trend changes but we don’t act on them until we have evidence that the market is doing what we anticipated.
With a Sell Short day we watch the previous session high as our reference price. Specifically, if on a Sell Short day the market rallies above the previous day high, we define a move back under the previous day high as evidence of a trend reversal and a signal to short the market.
In the overnight session wheat saw further strength, rallying above Thursday’s 684-4 high and ending the night session at 687-0. At the 8:30 open, a rally resumed, although the day session rally stopped below the overnight high.
About an hour later the selloff took off, breaking below the day session low of 685-0 and then Thursday’s high of 684-4. Breaking below these two levels triggered our short sale (s). The initial stop loss could go above the last day session high of 693-0.
Breaking the reference price led to a quick selloff; by 9:40 it made a session low of 675-2. After two lower intraday swing highs, it dropped to a session low of 671-0. It made an intraday double bottom about 20 minutes later, signaling a low was likely in.
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STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
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