In last night’s edition of Swing Trader’s Insight I labeled the December Lean Hog futures as a Buy day according to the Taylor Trading Technique cycle, and I reiterated that call in this morning’s STI watch list. If that didn’t get your attention, the gap lower open this morning should have given you a heads up to look for a trade opportunity this morning.
The rise of almost 24/7 electronic trading means opening gaps have become a less frequent event as most markets don’t have a long enough timespan between sessions for them to occur. While around the clock trading is a boon for many traders, it has changed many of the approaches and setups used previously. That’s one reason I like to trade stock indices, grain and meats; they still have distinctly delineated trading sessions, which means you can still look for some of the “old school” setups like opening gaps.
Opening gaps (when a market opens above the previous session high or below the previous session low) are a signal to pay attention to a market, often indicating that something occurred between session to cause a large change in a market’s perceived “fair value” price. In this case, the hog market had a quarterly USDA Hogs and Pigs report, which showed the US hog herd was expanding faster than expected.
For the December hogs, Thursday was a Taylor Trading Technique (TTT) Sell Short day; it opened near the high of the daily range and sold off during the session to close near the session low. This meant for Friday we would anticipate a TTT Buy day- look for an initial move below the previous day low and then a reversal to a rally. We would look to go long when the market traded back above the previous day low –what I call a “reference price”.
The hogs gapped lower this morning as traders reacted to the bearish USDA report. This told us to look for a breakout move; a directional move lower if the bears were still in control or a rally if traders thought the lower open was “too cheap”. We could look to play the market in either direction; we could go short if it broke below an early session low OR go long if it rallied back above resistance.
In this case we would look to go long if the market traded back above the Thursday low. That would fill in the opening gap and fulfill a TTT Buy day entry. We got the long entry trigger around 9:05 AM. I use stop orders to enter these trades, placing them a few ticks above the reference price. This allows me to have my trade planned in advance and limits the amount of decision making I have to make in the heat of the moment.
Likewise, I use our platform’s OSO (Order Sends Order or contingent order) to have a trade’s stop loss be placed automatically when I get into a trade; it’s another way to reduce in the moment decision making. For the hogs, the initial stop loss would go below today’s low of 57.35.
Hogs rallied throughout the morning, gaining momentum in the positive feedback loop often seen when other traders are surprised (and often on the wrong side of) a market move. They made an initial high of 61.15 around 11:20 AM (12.5 points short of limit up) which could be taken as a reason to take profits. If that didn’t do it, the double top made around 12:40 was a second chance to sell out near the high.
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.
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.