Trading a Long Entry in Wheat

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Trade Focus added long December Wheat entries to its suggested trade positions with today’s action. Here’s what we said in our last edition:

WHEAT (DEC) - We will stick with last week's suggestion: “We believe long entries can be initiated with intraday penetration of 48550 or with a close at or above 48250. Stop protection if elected we believe should be intraday penetration of 44500 or a close at or below 44900.” Retracement levels of resistance are approx.: 49450; 51170; 52910.

This suggestion has been in the past two issues actually, and due to certain circumstances we were unable to publish this past Thursday as usual. But, the point is Wheat has been on our radar for a while now and may provide a very tradable retracement or correction. There are two sets of Fibonacci retracement levels that the December Wheat may seek. The first set is approx.: 494.50; 511.75; 529.00. The next set above is approx.: 547.50; 581.50; 615.25.

The latest USDA crop production report did not paint a very bullish picture for wheat prices but we certainly have seen markets behave opposite to such reports in the past.

As always, a trade is only a trade and needs to be approached and treated with a planned strategy and discipline. It’s wise to know not only where a position should be entered but where it goes wrong and therefore where stop protection needs to be placed. Along with these, a profit objective or plan of how to liquidate a position when right should be part of the plan.

In the case of this December Wheat example, there was an entry method that was satisfied triggering the trade suggestion. Notice that the September high was cleared and also that the 50 day moving average was cleared on a closing basis. There has also been a stage 1 breakout above the steep trend line which acted as a first alert. We have also identified what we believe to be valid stop protection. The last piece of the puzzle now is exiting a winner.

Exiting a winner is not as easy as most people and traders might expect. It is our belief that this is the time to take all the emotion out of the equation. When trading in multiple units, for example, we believe it very beneficial to choose a target level where a portion of the entire position is liquidated while simultaneously moving the stop protection in a favorable manner. The idea is to reduce risk exposure while still maintaining a piece of the position in case it continues in the desired direction and particularly if something special develops.

Using this example, or any example for that matter, it is up to the individual trader to determine exit strategies based on his/her own set of variables. We might suggest here, as a general strategy, to begin moving stops at the 511.75 Fib level and with partial profits coming off at the next 529.00 level. If the price of December Wheat continues to gain there may be points along the way where adding positions would become warranted. We will be watching for these opportunities.

These types of strategies are something that we discuss with our clients on an individual basis taking into consideration their personal viewpoints. We find that there is benefit in working together on a strategy. If that is something you are interested in or would like to know more about let us know.


Good trading to all

Jeff and Diego
CB&S Division of MF Global Inc.

Futures and options trading contain substantial risk of loss and may not be suitable for all investors.