futures trading entry point
A favorite approach of mine in trading outright futures (instead of options) is to wait on a short-term correction in a market that challenges support or resistence levels. I like to buy at or just above support levels and place the stop just below. This tight stop placement minimizes risk, but gets a trader in the market at the bottom of the trading channel, which can oftentimes offer significant upside potential. Of course, this is most "comfortable" in a market that has a longer term trend intact without a history of a successful challenge of that level--anything to stack the odds in favor of the longer-term trend staying intact. While this method doesn't put a clean cap on risk, it's about as good as it gets when trading outright futures.Some traders like to wait a on a confirmation of a "breakout" in order to enter a position. In my experience this approach can work just as well, but it can make trading choppy markets more frustrating. If you have a market that is churning back and forth over an extended period (building momentum) and one day you have a breakout, this will pull a lot of traders in the market that are speculating on a continuation of the breakout in the same direction. The problem with this is that choppy markets seem to oftentimes be plauged wth "false breakouts." Of course all of this depends on the trader's individual risk tolerance and personal preference for the more reassuring trade, but if a market is chopping I like to swing trade the channel by purchasing near the bottom of the channel (when it's challenged). When trading with this approach, I generally stay on the side of the market that is in line with what I perceive the longer-term trend to be. For instance, if the longer term trend that has remained intact over four months in corn is bullish, then I wait for a buying opportunity near the lower part of the channel, hold the position as it works higher in the channel and set a relatively tight stop so that I don't forfeit the opportunity to maintain the position should it have a breakout to the upside, but I also preserve capital if it's just another wave in the churning cycle.
Another important consideration is the seasonality of markets. The corn example above is oversimplified to illustrate the channel trade, but there are definitely some other factors to keep in mind. If the market is churning before a key period in the growing season, a trader may want to consider being a little more generous with their stop placement. There may be some violent swings, but being right about the longer-term trend in a market that is poised for a large move (higher or lower)...
posted by jared @ 5:53 PM
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