How many times have you watched a strongly trending market, trying to figure out how and when to get on board? When you do look to enter, how do you know that the trend will continue; that you won’t be buying at a top or selling at a bottom?
One key, I’ve found, is to look for times when a trend pauses, then enter in the direction of the dominant trend when the trend resumes. I’ve found that breakout setups are often good “pause” patterns; using the breakout entry and exit criteria I teach are a good way to enter and manage trades in trending markets.
We’ve had some big rallies in the physical commodities this week, notably the metals and the grains. When markets make these steep moves (gold has rallied about $70 in the past week!), it can hard to know how to enter these nmarkets, and then manage risk once you’re in. In addition to gold, soybeans had a big rally this week.
Soybean futures have been in a downtrend since mid-August. On the daily chart below, I drew a trendline across the series of lower swing highs as it trended lower. Last week beans traded sideways, then on Friday they broke out of out to the downside, dropping down to test the July lows/double bottom around 881.
Monday saw a doji bear and a range contraction from Friday as it tested and held the July lows. Monday’s bar was a breakout signal for Tuesday, Tuesday saw a breakout day rally as it bounced off support.
Broke the trendline today
Yesterday was a classic breakout setup. It had the smallest trading range in nearly a month, and was an inside day. In addition the past two day’s highs were right up against the trendline that had contained rallies for the past months.
Two breakout setups
The inside and narrow range day yesterday meant we were looking for a directional move today. In the intraday chart below, I drew lines at price levels to use for potential entry and exit points for breakout trades. If you go back up to the daily chart you can see how I derived the entry and exit prices.
Entry and exit levels
There were similar breakout setups in gold, silver, and a number of currencies, and all had rallies similar to soybean’s rally today. I chose the beans for this example to show the trendline break. In the bigger picture, this same pause pattern would have given you a good entry method for trending markets, and a relatively low risk trade if the trend doesn’t continue.
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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