Meat futures

[Joe Ross]

Meat futures often tend to have a 50% to 70% daily and weekly-range overlap. This means 50% of one day's or week's range will be found in the next price bar. Try to buy on the bull market dips below the previous day's low, and near three-day lows. Avoid day trading cattle and hogs without longer-trend time and price objectives. Slippage in these markets can be terrible. Bellies should be day traded only with stop limit orders at time of entry. Belly fills are almost as bad as coffee fills, which are usually the worst. There are six traders who can dominate the meat markets with their buying and selling pressures, and move the markets like a champion yo-yo professional.

If you like to trade the meats, test the following method: note how much today's high exceeded the high of the day before it, and try to buy the market an equal amount of points below the most recent trading day's low. Example: Let's say that day Two exceeded the high of day One by 40 points. Then try to buy the market tomorrow 40 points below the low of day Two. Next, try this same method for weekly bars.

Meat market traders might consider keeping intermarket spreads between hogs and bellies, or cattle and bellies, then analyze the markets individually to denote different major trend reversals for these markets. There are some traders who make an annual income trading only the hogs and belly spread. Pork Belly contract months August and February (of the next year) create weekly chart gaps that skew price data and make some types of historical price testing impossible. Real time data is required to overcome this disparity for testing. Spread only the same contract months on inter-market spreads, unless inter-market spreads have been analyzed and reveal that you should do something else. When deferred hogs are gaining over the nearby contract, and nearby bellies are gaining over deferred contracts, stay with the most active months of long bellies and short hogs.

None of this is to suggest that you trade bellies at all. I will not touch them with a ten-foot pole under any circumstances. I find it much easier to trade live cattle-live cattle spreads, live cattle-feeder cattle spreads, lean hog-lean hog spreads, and live cattle-lean hog spreads.

If you are not familiar with spread trading, you are truly missing out on some of the lowest risk, consistently profitable trading opportunities. Over the years I have earned far more profits by trading spreads in the meats than I ever have by trading in the outrights.

 

[bakrob99]

If you are not familiar with spread trading, you are truly missing out on some of the lowest risk, consistently profitable trading opportunities. Over the years I have earned far more profits by trading spreads in the meats than I ever have by trading in the outrights.

I liked your thoughts on Meats and spread trading in general. I have looked at currencies on a spread basis, and Metals but haven't spent much time looking at Meats. I must confess that I really don't have any idea how to "properly" trade spreads, but I do have some ideas to share for discussion.

I have attached an example chart which plots Frozen Pork Bellies against Lean Hogs. I set the price scale to be relatively the same on both contracts (although obviously at different absolute prices), then plotted a 50SMA against both contracts. When divergence occurs look to play for them to come back together.

The trade example shown was generated when a close below the Low of the Highest bar occurred on the Frozen Pork Belly market signalling an entry at the open the following day. A stop would be placed above the high of the highest bar. The trade was triggered on Sept 17 09 and exited on Sept 23 at a profit of $2500 per contract. This setup when traded on a Daily Bar required a stop of approx $850 and yielded a 3:1 Reward to Risk ratio. The actual heat on the play was around $300. Entering on a smaller timeframe could have reduced this somewhat at the risk of missing the trade if the market broke.

The other side of this trade cold have been taken by going Long the Live Hogs simultaneously, or "legging In" waiting for a similar Long signal to occur. If entered immediately, the trade would have lost around $850 in the same time, but provided a degree of safety in the event the markets continued to separate.

Comment welcome.
bakrob

PS ... I will have to figure out how to post this chart ... stay tuned.

 

[bakrob99]

Here is the chart I referenced in the prior post.

 

[bakrob99]

If you like to trade the meats, test the following method: note how much today's high exceeded the high of the day before it, and try to buy the market an equal amount of points below the most recent trading day's low. Example: Let's say that day Two exceeded the high of day One by 40 points. Then try to buy the market tomorrow 40 points below the low of day Two. Next, try this same method for weekly bars.

Joe - I can find examples where this works nicely with WEEKLY bars, but I have not yet found it working on DAILY. Could you post a chart?

 

[jaspertrademaster]

Joe Ross seems like a nice and knowledgeable guy. Thanks for the info.