Q&A
Futures For You
Inside The Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today’s futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options and A Trader’s First Book On Commodities, are available from FT Press.
Looking for summer patterns
What are some seasonal patterns we should be looking at for summer commodity trading?
Seasonal patterns are evident in commodity markets throughout the entire year, but some of the best opportunities occur in summer. That said, the seasonal tendency of a market is just that — an inclination to behave in a certain way, but it is not a guarantee. For seasonal traders, it is important not to become complacent in a speculation simply because it happens most years. Counterseasonal moves can be fierce and have been known to cause severe monetary damage to those caught unawares.
The grain markets often see a significant amount of spring and summer volatility as the markets contemplate planted acreage, growing conditions, and other factors. Prices are susceptible to bouts of weather spikes as traders react to news of conditions that are inevitably “too wet” or “too dry.” However, even during the most trying of growing conditions, early summer rallies have failed to maintain themselves in the long run.
The seasonal price peaks in corn and soybeans correspond with planting completion. At that point, the planted acreage is known and it is all up to the weather to deliver ideal growing conditions. You may have heard the saying “Rain makes grain.” Well, it’s true — grain traders at the Cbot will tell you the bias is bearish on days it is raining in midtown Chicago. Of course, too much of a good thing results in flooded farmland and will have the opposite effect. Conversely, a hot and dry environment will trigger temporary price hikes.
According to the seasonal data I have reviewed, traders should favor the short side of corn and soybeans from late May or early June on. Large rallies in the early to midsummer months should be looked at as selling opportunities. Unfortunately, nobody really knows “how high is too high” until after the fact.
That doesn’t mean that come June 1, we should automatically sell futures, but as May winds down, traders should look for an opportunity to look for bearish trades. This seasonal grain trade typically lasts over a month, so traders should cover before mid-July.
Don’t make the mistake of assuming that wheat follows corn and soybeans. Wheat is on the opposite harvest cycle and therefore is seasonally bullish beginning in May. The tendency for wheat to move higher often extends into late September, but the “real” trade is to be long the market, via options or futures, from mid-May into early July.
May through June is also one of the best times of the year to be bullish cattle prices. The buying interest is attributed to the summer barbecue season, but I am not sure that is true. According to reliable sources, beef consumption actually declines as the weather gets hotter, but so does the beef supply as feedlots tend to be in a pinch, and that is what pressures meat prices higher.
Another popular seasonal trade is the summer coffee fade. Coffee prices tend to build in a spring premium to account for potential freezing and crop damage in Colombia and Brazil. More often than not it turns out to be much ado about nothing. Accordingly, coffee prices often experience a sharp slide from late May into early July.
Stop limits
When should a stop-limit order be used?
Stop-limit orders can be confusing; is it a stop or is it a limit? A stop-limit order is simply a stop order that limits the slippage that a trader is willing to accept. Before we can understand the potential uses for a stop-limit order, we must understand its components.
By definition, a stop order is a request to buy or sell a futures contract at the market once the stated price has been reached or becomes part of the bid/ask spread. Traditionally, a stop order is most often used as a means of mitigating risk of exposure or locking in a profit. However, stop orders can also be used to enter a position. If a trader places an order to buy July soybeans at $9.55 on a stop (note that the price of a buy-stop would be higher than the current price), they will purchase a futures contract at the market once prices rally to $9.55. This fill price might be higher or lower than the stated price, depending on how fast prices are moving. That said, I have yet to see a stop filled at a lower price, but it is possible for substantially higher (worse) prices in thin or volatile market conditions.
A limit order is also known as an “or better” order because a trader placing such an order is asking for a specific price or better. However, the term “limit” in stop-limit is under a different context; again, it is a limit on slippage, not the seeking of a better price.
The peril of a stop-limit order is that it might not be possible to fill the order. If the market moves too quickly and a trade can’t be executed within the stated limit price, it can go unfilled. If the stop-limit was placed as a means of protecting open profits or exiting a trade gone bad, this can be a dangerous proposition. I would not recommend using this order type to exit a position. A traditional stop order or even the purchase of an option would be better.
However, if you are using stop-limits to enter a market and you can live with potentially missing trades that would have been profitable, this might be a legitimate order type.