Saturday, June 25, 2011

Trading Grain Futures (Part 1)

I wanna do a series of posts on trading the grains futures; corn, soybeans and wheat. I think the grains offer up the most amount of opportunity than almost any other futures contracts out there. In this post I will highlight the basics you need to know and the specs between the different contracts. Corn and soybeans specifically are the two that I focus on day trading the most for several reasons. And don't worry you wont get delivery of 5000 bushels of corn in your driveway if you trade it.

So why trade corn instead of, say, the ES or other stock index futures?

  • The grains are a true momentum market in which once they pick a direction they trend in that direction for quite a while without many fake outs or bull/bear traps at highs or lows. In other words, you can buy breakouts and sell breakdowns without worrying about trend reversals. The moves made in corn or soybeans are very trendy and smooth, allowing a trader to stay in for the big move that often comes while still being able to manage risk.
  • The pit session is open from 10:30 am EST-2:15 pm EST. So if you don't like long hours then this market is for you! There is also an overnight session that runs until 8:30 am EST each morning then closes for two hours but I just focus on trading the pit session and usually you can count on some great moves occurring in just the first hour or two.
  • The daily ATR (average true range) for corn currently is 22. This means on average it moves 22 points per day, or about 3%. Soybeans have a current daily ATR of 28 or about 2%. Compare this with the ES e-mini contract ATR of 16 points or 1.2% and you can clearly see the added volatility in the grains. And where there is volatility, there is OPPORTUNITY.
  • There is basically one USDA crop report per month. That's it. You don't have to constantly await new economic data coming out and try to anticipate the market's reaction to it. Just trade the trend. The trading is great on these crop report days as you often see limit moves up or down in price. I will get into price limits another time.

The tick increments for corn, wheat and soybeans are $12.50 per quarter point ticks or $50 per point. So the same as the ES mini futures. The intraday and overnight margins are also very low for corn and just a bit higher for beans and wheat. For example, corn has a margin of just over $2,000 per contract and if you have a good futures broker you can get intraday margins of just $500 per contract.

Now that we got some of the basics out of the way let's look at a real trade example from last month to highlight my strategy. My strategy is trend following and follows the concepts I discussed in my previous post you can read here

I usually trade corn off a 233 or 333 tick chart and get my big picture view off the 60 minute chart. So if the 60 minute is bullish and rising then I focus on buy setups to go long and vice versa. I almost never fade the trend of the 60 minute chart in corn and there is a simple reason. Trends in the grains can last longer than you can imagine. That's why daily limit moves in price happen so often.

So in this trade from 3/25 you can see the corn market was trending up and the lower TTM wave is all above the zero line and blue so I am focusing on buying. When the squeeze indicator pops up as shown by the arrow, I already know the trend is up so I am looking for the trend bars to change back to blue to indicate the uptrend is resuming. 

This trade starts at the red vertical line. I go long corn at 690 and within a half hour I sell it at 695 when I see two red trend bars in a row. A net profit of +5 points or $250 per contract. 

Instead of trying to over-think things and attempting to catch tops or bottoms I just let the market price action tell me when the buying or selling pressure is changing. Sometimes that means you get stopped out for breakeven or even a loss, other times it means you catch a nice runner of 10+ points in the grains.

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