If you pay attention to Commodity Trading Advisors (CTAs) who employ a trend following strategy to manage money for their clients, they will primarily tell you it is not a good idea to deviate from the trading system they are using.
In other words, they have rules for entering positions and rules for exiting positions, and they don’t feel that it is a good idea to use any discretion in either case.
As a result, they will often be forced to give up substantial profits by waiting for their exit signal to kick in.
This is where the individual trader can develop an edge.
There are times when it pays to exit a position, or at least part of a position, when a market offers you an opportunity for a windfall profit.
Knowing when an opportunity is at hand requires some historical knowledge of the market you are trading.
One such opportunity appears to have presented itself this past week in Wheat futures.
Historically, wheat futures rarely break out into a massive trending move. It offers small trends every now and then, but rarely does it offer a windfall profit.
Prior to this year, the last major trend in this market occurred in 2007-2008, during the commodity boomlet that occurred just ahead of the Financial Crisis.
The “easy” part of this trade for trend followers occurred from late May to early October. The market broke market’s initial 20 day breakout was at around $5.05, and then its more important breakout was around $5.34. It then made a 20 day low in early October at just below $8.35.
This equates to a profit of about $15,000 per contract based on the second breakout level and just over $16,000 on the initial breakout.
Keep in mind, that trade occurred over the span of about four months.
After a correction, the market trended higher into March 2008, but the volatility had increased substantially, and if you were using the same entry and exit rules, and risk management rules as before, the profits were not as good.
Going back about 40 years, that initial trade beginning in late May or early June of 2007 was the single best trending move in this market.
Fast forward to now.
This is the recent price action in Wheat futures, which is resulting from Russia’s invasion of Ukraine, one of the biggest wheat producers in the world.
Considering the same entry rules as in 2007, positions could’ve been entered at about $8.14 and $8.32. The volatility is a bit higher compared to 2007, with the 15 day Average True Range at the time of these breakouts of around 25 cents compared to about 15 cents in 2007.
Therefore, your position would be smaller.
However, within about two weeks of the breakout, the market was making limit up moves and traded as high as $13.63, and $12.94 on a closing basis.
In other words, at the from the high breakout level of $8.32 to the high close of $12.94, the per contract profit was over $23,000.
That is the definition of a windfall profit. This is an unprecedented move in the market going back decades.
Since then, the market has pulled back to a close of $10.87 on Friday.
While the market can certainly go back up, the volatility has increased dramatically, and the equity swings in your account will be substantial.
And, if you are to wait for a 20 day low in this market to exit the position, you would actually lose money.
This is a textbook example of when to discard trading rules and take at least partial profits on a trend following position.
If you are interested in learning more about trading these markets, check out my Futures Trading Course.
TRADING FUTURES INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS.
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