I wrote about a potentially bullish setup in soybeans here. The setup was based on several factors. The setup is now worth another look.
Figure 1 displays a bar chart for May soybean futures.
Figure 1 – May Soybean futures (Courtesy ProfitSource by HUBB)
(See also 3 Reasons to be Bullish on 2016 (and 2 Reasons to be Scared as Hell))
As you can see there is a “line in the sand” level of support at the recent low price of 853.5. On 2/29/16 May beans closed at 861. So – in theory – a trader could:
*Buy May soybean futures at 861
*Place a stop-loss order somewhere below 853.5 (for arguments sake let’s randomly pick 852.5)
*Risking a loss of -$425 ((852.5-861 = -8.5 points times $50 a point)
On the other hand if May soybeans bounced backup their recent high (recorded just 6 trading days ago) of 890, the buyer might generate a profit of +$1,450 per contract (890-861 times $50 a point)
On the face of it, this looks to me like a decent setup with:
*An obvious “Uncle” point (i.e., a support level that has acted as a low in November, December and January)
*A reasonable dollar risk (-$425)
*A decent potential reward-to-risk ratio of 3.4-to-1
So what could go wrong? You had to ask, didn’t you?
Well that’s easy. Bean prices could drop through the previous low like a hot knife through butter by the time you read this article. That’s one possibility. Another thing to remember is that grain prices can and do “gap” – i.e., open sharply higher or lower from the closing price of the previous day – from time to time. A “limit” move in soybeans is 30 points.
So a trader could:
*Buy a soybean contract at 861 thinking he or she is risking only $425
*Watch May soybeans gap open 30 points lower to 831, and
*Find themselves with a $1,500 open loss in a market that is “limit down” and unable to get out.
So while the example I detailed above in theory risks only $425, the actual “real world” risk is is that something “unexpected” happens.
What are the odds of May soybeans gapping “lock limit” down anytime soon? It beats me. But the important thing is that you are aware that such a thing can happen and that you are willing to accept that risk.
(See also Jay’s Trading Maxim’s (Part 1))
Summary
OK, this all sounds like a “recommendation”, but it is not. It is simply an example of one relatively simple way to use price action to identify a potential trading opportunity.
Jay Kaeppel
