Trading Commodity Futures - Waiting an Extra Day to Prove
Support and Resistance
Question
I reviewed my Silver futures trade this evening. I went back
over your entry notes on pg 44 of your manual. Using a Sell Stop
Order when the market touched 6.20 was really in anticipation of
Support holding; however, it was probably not the market to do
this type of entry.
Probably the late Entry method 2 would have been best, but I'm
not sure how I can implement this during the day when I can't
watch a trade chart. If you have any suggestions, please advise.
I'm thinking that I'm probably going to be limited to certain
types of trades and may need to wait an extra day to prove
Support or Resistance before placing my trade. What do you think?
Answer:
Honestly, you did nothing wrong, it was just a trade that went
sideways. Let's review the trade briefly and I'll tell you where
the boo-boo was.
We were looking for the market to break the mild support at 620
and head lower. Why 620? Because we had a two sessions in a row
find support close to there AND by breaking 620 we would also be
breaching the 5 day moving average line, which represents the
weekly trend. Combine this with a very overbought market (RSI)
that is beginning to slope downwards and I thought we had all
the markings of a short term retracement.
However it didn't turn out that way. Why? Primarily because it
was a COUNTERTREND trade.
In hindsight I should've maybe given it a higher risk rating;
however it did appear that all the pieces were falling into
place...all except that trend piece.
Because of the extremely strong trend the market was only able
to fall low enough to find our order, and not much further. As
you can see from Thursday's closing price, the market fell and
then rallied hard again. This is the market's way of saying "I
don't want to go there!" If we didn't get whipped out of the
trade so quickly, the update would've suggested a very tight
exit stop as prices were appearing more bullish again.
This week looks like more of the same. Sure the market's still
overbought, but I wouldn't be surprised to see higher prices
still! Looking for resistance at 720 - 723 area, but we'll see
what happens.
And that's the Reader's Digest version of what happened. It's
just a part of trading. You didn't do anything wrong regarding
your orders; the trade just didn't work out. It happens. If it
makes you feel any better, I took a hit on it too. ;-)
Remember, countertrend futures trades are inherently more risky,
but they can offer better entry potential. This is where the
late entry part comes in. You wouldn't use a late entry to
initiate THIS trade, but if the market behaved as we hoped, we
could've used a late entry to re-enter the market in
anticipation of support.
Let's say the market did do as we hoped and fell off to support
at 594.50. Because we anticipated this to be a significant
support level, you could have exited here and reversed your
position taking the market long in anticipation of higher prices.
Entering before the market reacts allows you to keep your risk
tighter than usual. You'll see Tom do this all the time. He even
keeps his entries tighter than I do. Whereas I might risk $200
to see if the trade works out, he'll risk $50. The downside? His
tighter stop might get him stopped out two or three times before
the trade takes. So the end result might be the same, but it's
just a different way of doing things.
You don't need to follow the market during the day to be able to
trade this way. You can place your orders just like you normally
do (ie. the night before) as we're planning the trade based on
what we expect support and resistance to do.
If you're trading a smaller account, or if you're not sure the
resistance or support level is going to hold and cause the
market reverse, then you're better off waiting for the reaction
before entering the trade.
Again using the silver example, if things went according to plan
and the market fell off to 594.50, you could wait another day to
see what happened next. If the market reversed the next day (as
expected) then you could enter the day after ABOVE the high of
the reaction day. Exit orders should go below the low of
reaction day if feasible for your account.
If the low of the day is not feasible, find an intraday chart
(www.barchart.com has them for free, just pull up the market you
want and click on custom charts, or the 30 min chart for an
intraday overview) and try to find a support level within the
daily range from the intraday chart. Try to use the furthest
support level you can afford to hide your exit stops.
This would now put us in a more predictable trend trade, after
the market reacted to the anticipated support level; therefore
we might have greater confidence of the trade working out.
Alternatively, you could attempt to enter the market within the
daily range and place exit orders below the low. While this does
not "make the market prove you right" it will help you limit the
risk exposure somewhat. Again you could use the intraday chart
to help you find an intermediate resistance level as a guideline
for entering the trade.
You'll see me structure futures trades this way when I'm fairly
confident about the market direction, but a large range makes it
difficult to get into the trade for smaller risk.
Note: you will not always be able to wait for the reaction for
this type of trade. Sometimes the RRR will only make the trade
feasible if you get on board early. The upside though is that
there is usually less money at risk, so it's not a big hit if
the trade doesn't work out.
Hope that helps some. There are over a hundred more articles on
managing your futures trades in the members section.
-Erich