I’m a passionate believer that more active stock traders should consider trading in the futures markets (if it’s suitable, they have the risk tolerance, and they have enough knowledge). Futures offer trading opportunities in liquid markets, many with low correlation to other investment classes. To help educate traders about the futures markets, I wrote a guide I call “Futures for Stock Traders”, or Futures 101(you can sign up for a copy here).
I’ve a lot of interest, and good reviews for Futures 101. In the process, however, I’ve had readers say they’ve read it and have become interested in futures; where do they go next?
I’m in the process of writing “Futures 201”, a practical guide to futures trading. I’ve already got a book written for Trade or Fade (get a copy here); Futures 201 will be a more comprehensive introduction to getting started in futures trading.
Last night I was writing a chapter about trend lines. Trend lines are one of my favorite tools for chart analysis. They help you identify and quantify trends, and also serve as support and resistance.
I was looking for chart examples of trend lines this morning and came across the chart for December Live Cattle. Today was a breakout day, as yesterday had the narrowest trading range of the previous four sessions. This meant we should be looking for a directional move today-the market would open on one extreme of the range, and then move in the opposite direction.
This is where the trend line came in. Looking at the daily chart below, the red down trend line defines the down trend, and has been touched numerous times, which attests to its strength.
The breakout setup today and the trendline meant today could be a big one for cattle. On a breakout day, we’re looking for a market to breach close in support or resistance, and then see followthrough trade in the direction of the breakout.
For the cattle today, the trend line was an obvious potential breakout point. If the market broke above it, it would likely see follow through buying; we would look to get in on that rally.
On the other side, if the trendline held, there would likely be selling, both from long liquidation on profit taking and short selling as traders recognized that trend line resistance held.
On the downside, I had 84.98 as the first breakout point (first support on Trade or Fade). On the chart, yesterday’s low at 84.85 was another downside breakout point.
Once short, initial stops would be placed over the high of the day. Profit targets were the Fibonacci retracement points at 84.45 and 84.20. Below there I’d look for the 9/21 low at 84.02 then the low of the move at 83.40 on 10/7.
By combining chart and single bar patterns, traders can find trades that don’t rely on indicators or complicated analysis.
Trend line held again
For more information on trading breakouts in futures, check out my Breakout Futures Trading Method book here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. 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.
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