Of the patterns I use for my Swing Trader’s Insight advisory, breakout setups are my favorite to trade (get my guide to breakout trades HERE). Breakout setups indicate a market that is set up for a potential large move in short amount of time – exactly the kind of trade that traders should be looking for. The past two days have seen good breakout trades, Monday in the live cattle futures and today in the lean hogs.
Monday saw a strong rally in live cattle as they rallied out of the narrow range pattern on Friday. I find narrow range days to be one of the more reliable patterns indicating a coming breakout move. They show a market with lack of participation and traders’ hesitation to either buy at higher prices or sell at lower prices. When either the bulls decide to buy high or the bears decide to sell low, a directional move occurs, with the move generating a positive feedback loop of momentum.
February lean hogs had a breakout setup as well for Monday, as Friday had been an NR7 day. What’s more, the market had gapped higher on Friday; it was likely that Monday would see the market would either fallback down to fill in the gap or resume the rally if there was to be an upside breakaway.
As it turned out, we really did neither on Monday as it had a still smaller range and roughly stayed within Friday’s high and low. This meant we would still look for a breakout move on Tuesday, anticipating either a selloff to fill in the gap or a new leg up if there was an upside breakaway move. For Tuesday our initial breakout levels would be the Monday high of 70.22 and Monday low of 68.95.
For markets that have a discrete day session open (livestock, grains and the 8:30 open for stock indices), I like to let the market establish an opening range (the first 5 to 15 minutes of the session) and then take a breakout trade when the market exceeds this range. For the Feb. Hogs today we would either look to go long when the market took out the 70.25 high or short if it broke below the 69.77 low. I entered a buy stop to go long if it rallied above this high.
The long entry was triggered around 9:05 AM as the market started moving higher. The initial stop loss went below the 70.02 low made around 8:50 (I like to use the OSO – Order Sends Order- feature to send in the stop loss automatically when I get stopped into a trade.)
By 9:35 the market had rallied to a session high of 70.90; this could have been a time to take a partial quick profit if you chose to. I find that breakout trades often move in one direction over the course of a session as the positive feedback loop continues to squeeze the market in one direction. As such, with breakout trades we are often rewarded for having a longer hold time for these trades. We saw that today as hogs moved higher in a familiar “3 pushes” pattern to close near the high of the session.
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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