Markets provide an endless stream of opportunity. At any point during exchange hours -- virtually around the clock in many cases -- traders can enter, exit, add to or subtract from positions. The opportunities and price combinations are limitless.
To capitalize on the opportunity stream, you need to stay with the flow and identify signposts that define the predominant trend -- the direction in which to trade.
Using benchmarks and technical signals to determine a trend will keep you on the right side of a trade. They'll also cue you when high reward-to-risk trades are setting up, providing you with the ability to enter or add to positions in the endless stream of opportunity.
Benchmarking Bean Meal
Simple benchmarks can be just as effective as complex technical indicators in identifying a trend. Look at the following December
(SMZ2:CBOT) chart. The contract has been trading below its 50-day moving average for six weeks, indicating that the long-term (two-month) trend is down. Bean meal has also failed to remain above its 25-day moving average, indicating that the intermediate, or one-month, trend is also down.
In terms of a technical signpost, price action around the benchmarks can be key. Notice that bean meal left a bearish tail at its 50-day line, a point that also coincides with the 38.2% retracement of the Sept. 11-through-Oct. 10 downward thrust.
Tagging and then retreating from this confluence in a bearish tail-bar formation is a strong confirmation that the prevailing force of the opportunity stream in this market remains to the downside. The tail bar technical sign, coupled with persistent closes below the long- and intermediate-term trend moving-average benchmarks, also identifies the defined-risk "out," or stop, for the current trading opportunity.
Tuesday's action leaves soybean meal in a defined-risk trade setup. To remain consistent with the 25- to 50-day trend and the possibility of bigger gains, we switch our focus to the March 2003 contract (SMH3:CBOT).
March bean meal stalled at its 25-day line, a level that coincides with the 61.8% retracement of the down move from the above-described tail. This leaves March meal in a pullback from low setup with overhead resistance and a defined-risk short entry opportunity at the confluence of the 61.8% level and its 25-day moving average, a level indicated by the smaller red rectangular box in the following chart.
You'll know the intermediate-term trend is invalidated, and the trade is wrong, with two or more consecutive closes above the 25-day moving average. For traders who prefer a wider stop, consecutive closes above the high of the bearish tail or the 50-day moving average will be the exit point, as well as a strong indication that the downtrend is in jeopardy.
Bean meal has traced a head-and-shoulders top, suggesting the market could make a measured move out of the formation to a target of 146.0. This yields a reward-to-risk profile of 10 to 1 for the tighter stop and 4 to 1 for the stop above 172.8, the high of the defining bearish tail bar. Both profiles meet the majority of professional traders' reward-to-risk criteria.
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he was short soybean meal, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there fromTheStreet.com.