In this morning’s Swing Trader’s Insight Watch List, one of the setups I pointed out was the breakout setup in the lean hog futures (read the watch list HERE). I like to trade markets that still have decent pit volume or otherwise seem to get going later in the morning (stock indices, grains, livestock) as they often give trade opportunities at “reasonable” hours (i.e., not 3 AM); today’s hog trade was a good example.
The lean hog futures have been in a daily down trend as the PEDv scare rally of earlier this year exhausted itself. October lean hogs fell hard over the past week, falling from last week’s high of 114.10 to Tuesday’s low of 105.175 (a move of $3570 per futures contract).
Tuesday saw a narrow trading range (NR4) and a doji bar, giving today’s breakout setup. The recent selloff and Tuesday’s pause was bound to find buyers looking to pick a bottom today. The breakout setup told us to keep an open mind as to direction but to anticipate a large move in one direction (as the daily trend is down I would prefer to short it, however the market is in charge of where it wants to go. We just look to go with the flow.)
In the STI morning watch list I listed the overnight high of 106.75 as the reference price for an upside breakout. Our first reference price for an upside breakout is the previous session high but as that was taken out overnight and with a daily down trend it made sense to require a rally to show a little more proof before buying. I prefer to wait for the pit open to trade livestock futures and the overnight high wasn’t taken out after the pit open.
The downside breakout reference price was Tuesday’s low of 105.17, meaning we would look to short HEV if it broke below this level. I usually prefer to have resting stops to enter breakout trades rather than trying to manually enter a trade after a signal. If you have a trade platform with an OSO (Order Sends Order) you can have your stop loss entered automatically as soon as you are stopped into a trade- it’s a good safeguard in case you get distracted or are away when a trade is entered.
The first short entry signal occurred a little after 10:30 AM CT. If you didn’t get it the first time, the market retraced higher a bit and then decisively broke down about 15 minutes later.
The initial stop loss could go above the most recent swing high of 105.75, or above the EMA (green line) if you wanted a wider stop. As it was, the selloff turned into a rout and by 11:30 AM it traded to today’s limit down price of 103.07. As it couldn’t go any lower today, I would be inclined to take profits and a second test of limit down 30 minutes later strengthened that thinking.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
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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