The sugar market has been in a trading range between 16.50 and 18.80 since the end of February. Commercial traders as defined by the CFTC’s Commitment of Traders reports are value players. They either produce the commodity they’re trading or need the commodity as processors. Simply put, commercial producers are keenly aware of, and opportunistically act on prices they perceive as above fair value to lock in the best forward prices possible thus, capping market rallies. Similarly, commercial processors and end users eagerly take action to ensure lower input costs when the opportunity arises thus, supporting market bottoms. Their combined actions create the sideways and very tradable meandering action we’ve seen over the last few months.
Our strategy sets us up to trade only one side of a sideways market. We only take trades following whichever side of the market is in charge at the moment. Currently, commercial trader momentum is positive putting the buyers in charge. They’ve been net buyers in each of the last three weeks bringing their net position to long nearly 150,000 contracts. Clearly, their actions are bullish as we head into the end of July seasonal peak for the October #11 sugar futures contract.
Finally, we wait for the market to become oversold against the commercial traders’ positive outlook. Trades can be missed waiting for the market to come back but, in our experience, it’s better to miss a trade than it is to increase the risk. Waiting for the market to move against the commercial traders decreases the per trade risk for those of us who are speculating. The risk is always measured to the most recent swing high or low which is currently 16.87 in the October contract made on the 17th.
The full setup for this trade, along with the commercial position and commercial trader momentum can be seen on this #11 sugar futures chart. It’s ultimately, a simple ready, set, trade process. The only real calculation to be performed is the risk calculation which is simply difference between the trader’s discretionary entry point and the recent swing multiplied by the number of contracts necessary to fit the risk criteria of your own account.
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