Following the commercial trader category in the Commitment of Trader Reports has proven to be my best strategy for trading the wheat futures markets. I’ve spent years overlaying the various trading groups position with market movement and the strategy I use for wheat is about as simple as it gets. I follow the commercial trader category and use their bias to determine whether I should be trying to buy or, sell this market. The basic strategy is to find strong commercial sentiment one way or the other and then wait for the market to move against the expected commercial bias in order to limit the risk on the swing trade.
This mechanical strategy triggered a long entry based on Thursday’s rally off of the lows. The trade setup actually began in early November. Commercial traders bought more than 67,000 contracts of Chicago wheat futures between October 25th and November 14th. This clearly established their long bias and put the strategy on the lookout for a buying opportunity. We got a quick, early play as the system went long from November 20th through December 4th. The chart for this method has been posted here.
Wheat futures have since declined by 10% in the face of a commercial position that has held steady. Thursday’s close was strong enough to trigger a buy signal on our proprietary momentum indicator. Our initial protective stop loss order is always placed at the most recent swing low. The system is right about half of the time but the average win is more than twice the size of the average loss. You can see which markets I trade individually and as a portfolio, here.
Our philosophy, probably from the old pit trader in me, is to try and generate the biggest chunk of profit in the smallest amount of time. Naturally, this points to swing trading.
