I like trading markets that have a distinctive open time- the grains, livestock and stock indices (the actual stock market) all open at 8:30 AM Central. This break between sessions can make for emotional and sometimes volatile trade and the emotional trading of others can make for good setups for those who prepare and keep calm when markets get volatile.
The live cattle market had a breakout setup for today, as Friday was an inside day with the narrowest trading range of the previous four sessions. These patterns told us to look for a potential breakout trade today- a move beyond close in support or resistance that would springboard to a larger move in that direction, as a positive feedback loop would drive the market in the chosen direction.
With my analysis (the Taylor Trading Technique I use for my Swing Trader’s Insight advisory), much of the time we try to anticipate the direction a market will move for a given session, looking for it to trend either higher or lower over the course of a session. We would then look to take a trade if the market moves in the anticipated direction.
On a day with a breakout setup we keep an open mind as to a market’s likely direction for that session. On a breakout setup day the market will often find a short term equilibrium point; a time and place where neither the bulls nor the bears want to “buying dear” or “selling cheap”.
This equilibrium isn’t permanent, however, and the move out of the short term equilibrium often results in a positive feedback look, as the nascent move finds more participation the farther it moves, with more traders recognizing the trend and either jumping on the bandwagon or closing out of increasingly larger losing trades. The effect of this is to amplify the move in the given direction.
We look to trade breakout setups by looking to enter a trade in the early stage of the trend. Specifically we look to buy when it moves above close in resistance or sell when it breaks below close in support. On a breakout day the simplest and most common levels to watch are the previous session high and low; this is where traders decided that prices were either “high enough” to stop buying higher or “low enough” to stop selling.
For the February live cattle our first breakout levels were the Friday low of 109.10 and high of 110.80- look to sell a break below 109.10 or buy above 110.80.On a continued move we had last week’s higher highs and lower lows to serve as additional reference levels.
This morning Feb. live cattle opened at 110.525. Within a few minutes it rallied above the Friday high, triggering our first long entry. A few minutes later it cleared last week’s high of 111.675, which could serve as a secondary long entry level or confirmation of the uptrend. The initial loss could be placed below the session low of 110.125- a new low would mean the market didn’t have the momentum we wanted to see.
The rally continued over the morning, reaching the recent high of 113.225 around 11 AM. This high could serve as a reference price to take profits; the inability to maintain trade above that level was a signal to close out longs. If you did take profits but were worried you would miss a further advance, you could look to buy a later move above the Dec. 1 high if it were to occur (in this case it didn’t do so.)
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.
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