ZW Long Risky Wheat Trade

 

Dec Wheat futures climbed above the 8ema on the Daily chart within the first 10 minutes of the 9:30am ET open. It stayed above the 8ema all morning until about lunch time, then slowly retraced back down, until it closed right on the 8ema.

My trading method requires a close above the 8ema to enter, and ideally the next candle that continues in the same direction. I should have at least waited for the close to see whether to enter or not. But at 12:15pm ET I entered a long position. This was a clear violation of my method, but it wasn't without a justification.

Both Dec Corn and Nov Soybean futures made a large move yesterday, and held the area of the highs today. Wheat made a nice move upward yesterday but not as strong. Its reasonable that Wheat would catch up in strength today. And it did make another significant move upward today. At noon today it was at the top of its candle and looked like it would continue on up. It looked like a reasonable probability it could hit my target (first target) of the 61.8% retracement of the yellow range.

In addition, the previous 2 days formed a Bullish Engulfing pattern, and the 2 days before that also  formed a Bullish Engulfing pattern. 

Two days ago the low price of the day hit the 76.4% retracement of the green range and rejected off it. (76.4% isn't an actual Fib ratio, the correct ratio is 78.6%. However, I'm told many people mistake the 76.4% because 100%-76.4%=23.6% which is a correct Fib ratio. So sometimes you see reversals at the 76.4% level rather than the 78.6%, but they usually look very close to each other on a chart.)

Also, stochastics have been oversold and turning upward and volume has been increasing the past couple days. Plus, today is Friday which means we could see a gap up Sunday night. Dec Corn futures gapped up at yesterday's open, as an example.

So, for all these reasons, I jumped the gun in 2 different ways and entered a long position. One way is I didn't wait for the current candle to close, and the other way is I didn't wait for the next candle to confirm the new direction. However, it was a logical decision, not an emotional one. Well, maybe a little greed effected my judgement.

The hard part was at the 14:00 ET Wheat market close. Price on the Daily chart was right on the 8ema, as you can see on the chart above. I could have taken a loss and exited the trade in order to prevent further loss on the next trading day. This is what my trading method would expect. But I reasoned that we came down in price because we bounced off resistance at the 50 sma, and its likely there was profit taking on a Friday afternoon. And we didn't go below the 8ema. So given the strength in Soybeans and Corn, and all the bullish technicals I mentioned, I decided to remain in the position because the odds are we'll continue upward next week.

Summary:

Entry 514

Target 524 1/2

Stop 502

Risk: 514 - 502 = 12 * $50/pt = $600

Reward: 524 1/2 - 514 = 10 1/2 * $50/pt = $525

I picked the 502 Stop Loss just under the low of today's candle. The target selection is described above. It is the first target because the 50% retracement of the yellow range is already very close and we have a lot of room left in the Stochastics. I also think we can go much higher, to around 569, where the Head & Shoulders Neckline, the 161.8% yellow Fib extension, and the AB/CD extension all converge. But I expect a pull back at the first target, so I want to get out at that point and re-evaluate.

Now you might say "Just a minute there pal. What's with the bad R:R?" You'd be right, and this is violation number 3, but I'm willing to tolerate the poor R:R because the odds seem very good we'll continue upward, and if so, at some point I'll raise the Stop Loss to a more advantageous higher level.