Saturday, June 25, 2011

Limit Moves in the Grains (Part 2)

We had a sweet limit down move in corn futures today so its a perfect time to highlight limit moves in grains and show you how I traded the action today!

One of the most interesting aspects of the grain futures is the frequency and power of daily limit moves in price. Drier than expected weather in Iowa cornfields can move the price of corn violently. A freak thunderstorm in the plains can make wheat rally hard. Soybeans can tank or rise with the fluctuation of oil prices intra-day. All this and more can make forced liquidation an exciting trading opportunity in the grains futures, both on the way up and down.

As I described in "Part 1" of Trading the Grainscorn, wheat, and soybeans are a true momentum market in which the pit session is open from 10:30 am EST-2:15 pm EST. Here are some of the basic specs of contract months and LIMIT price rules:

  • Corn Futures Months traded: March (H), May (K), July (N), September (U), December (Z).
    • Daily price limit of 40 cents or "points" expanded to 60 cent limit the day after the market closes at limit.
  • Soybeans Futures Months traded: January (F), March (H), May (K), July (N), August (Q), September (U), November (X).
    • Daily price limit of 70 cents or "points" expanded to 105 cent limit the day after the market closes at limit.
  • Wheat Futures Months traded: March (H), May (K), July (N), September (U), December (Z).
    • Daily price limit of 60 cents or "points" expanded to 90 cent limit the day after the market closes at limit.
The important thing to know when trading on volatile days where limit moves are possible is to NEVER fade the trend. Ever. If you do then you risk getting stuck in a limit move that closes locked limit and opens up gapping huge in your face the next day. You could get a margin call, not to mention a sleepless night in which you will quickly develop a close personal relationship with Jesus, praying that the market comes back in your direction, lol.

So how do you trade limit moves?

Let's use corn as an example. The daily price limit is now 40 points these days so if we get a move of 30+ points during the day it becomes a very high probability that corn will test the limit of 40 points. I like to call it the "Magnet trade" because once you get that close to limit you have margin clerks and poor folks on the wrong side of the trade liquidating their longs (if its a limit down move) or their shorts (on a limit up).

Also, when it hits LIMIT and comes off that limit maybe back to only down 30-35 points on the day to consolidate a little, then you almost ALWAYS see that limit retested by the end of the day. So you want to stick with the power of the trend and forced liquidation. Its a true magnet trade!

Finally, here is a 333 tick chart of corn today. I originally planned on taking the day off from trading but then looked at my phone after about 9am PST and saw corn was down 23 handles, lol. So I raced to my computer to see if I can get a piece of the action expecting a possible limit down! The perfect entry on the short side would have been on the break of the "first half hour range" as shown by the white rectangle and arrow below. If I was at my desk I would have shorted corn as the TTM squeeze fired off near 750 and corn tanked 20 points in less than a half hour.

The vertical white line shows when I got to my computer. You can see corn was down about 23 points and so I immediately started looking for a short entry. No squeeze showed up here but with the TTM wave (bottom blue indicator) below zero so I waited for a red TTM trend bar to switch from blue.

I shorted 735.50 and put in a 3 point stop at 738.50. My target was the limit down price of 729.25. Corn started to fall back towards the lows and I got filled about 20 minutes later for +6.25 points or $312.50 per contract.

When limit down was hit there was about 100 contracts on the bid and over 100,000 on the offer panicking to sell at limit down. Its pretty amazing at the power of forced liquidation when it occurs as traders and big funds are literally willing to get OUT at any price.

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