Another Look at Commodities (By Lucas)

Hi Slopers. I received a ton of good feedback from my last post, so here is another for your trading pleasure (I will keep this one shorter).

The way you look at a chart can really tell you a lot about your own trading style.  Support and Resistance are easily recognizable, but what you do with those lines is the trading music you create.  I have three charts to show you, all weekly, all most likely not on your radar, and all treating a support or resistance line differently.

First up is Oats Futures (/ZO):

I have put a little white mark on where I would like to be long.  You do not need to build a large case file for this trade; it has several simple things going for it. 

• First, it's a clean breakout over support. 

• Second, it's a breakout over a bottoming tail weekly hammer (which has a good probability associated with it).

• Third, it is a breakout over last week's topping tail hammer. 

I especially like the third point because all the bears that were short when we broke below that hammer's lows will have to run to the exits.  Sometimes this is referred to as a "Larry Williams play," who advocated treating hammers and hanging mans opposite to how most traders play them.  He liked to short below a bottoming tail hammer. He reasoned that all the bottom pickers would have to run to the exits  This play has the same mentality.

Next up is frozen orange juice futures (/OJ):

Let's build the case for this trade in the same way. 

• First, two topping tail hammers on the weekly are associated with a high probability breakout trade to the downside. 

• Second, this trade breaks significant support around the 113.20 area. 

• Third, the new high made last week was on diminishing volume. 

Now, could you build a case for the bullish side?  Sure.  Could you spend the next 45 minutes pouring over charts and data that argue against this trade? Yup!  By why waste the time (especially if you live in Arizona like me and it's perfect hiking weather)?  Tim recently did a post on how great "Trading in the Zone" by Mark Douglas was.  If you have read it, then you know it only takes one trader somewhere in the world to negate your edge.  Just one!  You have an edge, place the trade!  Period! Don't worry about trying to find that one trader; the odds are way against you anyways.

Lastly, Platinum Futures (/PL):

• First, a bottoming tail weekly hammer has a higher probability for a bullish breakout trade above last week's highs. 

• Second, a bottoming tail weekly hammer at support increases the probability of a bounce.

• Third, an upward trendline (not shown) adds further support to this bounce. 

Notice that this trade treats the support line differently then the previous two.  The previous two were breakouts through support or resistance.  This trade is a bounce off support.  All three of these trades have an edge to them, but I prefer the first two charts to this last one: that is my trading music.

My own personal style dictates that the market DO something before taking the trade.  The first trade is a breakout over last weeks highs, the second a breakout below the weekly lows, and the third another breakout over the weekly highs.  By making the market DO something before you take the trade, instead of just buying/selling at some level, you increase the probability of the trade working in your favor.  Plus it is much easier to manage risk as you can gauge your trade through the "time element."  If your breakout occurs and the trade is on, you can avoid taking a full stop loss by exiting when the market does not move in your favor in a timely manner (I didn't point out stop losses in this post, but they go without saying. I would use the opposite low or high of the candlestick).

Hope you enjoyed this post.  Tim said we could make a plug of our own blog if we liked, so here is mine: www.tarigal.com