Most commodity futures markets will tip their hand when it's time to reverse direction. Knowing how to read its language is the challenge. It's not easy. This is important information, since this is all you really need to know! Volatility is a clue as well as price synchronization. Read on about these unique observations. This information can be applied to most any freely traded market of any time frame.
Observation Trading Notes:
"Keep watching the five minute futures chart with the horizontal line tool to see price support and resistance. Then confirm this action on the one-minute charts."
We have all seen the stair step action of a trending commodity futures market. Sometimes you can keep buying those corrective spike dips into the previous highs. I call it resting on the hedge. The futures price will often fall back and find a cushion on the previous highs just like when you rest a board on a flat shrub. The board doesn't stop on the tallest tops, but settles into the average of these branch tops.
It's the same for price dips. Use your horizontal line tool to estimate where this average hedge level is and place a resting order there. With practice, you can sometimes grab the exact low of the correction, positioned for the next futures rally. It's a wonderful feeling when you get that price buffer from buying on a correction.
After your buy, if price starts getting squirrelly and starts to move through the hedge into the bottom range out of character, be alert for a break down and take your loss. Get out and wait for the next set up. If its a "high probability" trade based on other indications, you may considerer averaging down once first.
Observation:
"Sometimes you will see a double volatility hump plus a volatility die on declines with volatility increases on rallies near a bottoming area. After this bullish action, look for a LONGER rally than normal, probably a big zigzag upwards on the five minute chart lasting 3++ hours. The first wave up struggles but is persistent, while the third wave up catches the shorts by surprise and is sharp and strong. It may break the previous 5-minute major pivot if it is a big turn with the main trend."
To understand this pattern you will need to develop an indicator tool for measuring futures price volatility. As we know, most trending price action tends to get more volatile on the rallies and dull on the declines. It's the converse in commodity bear markets. Remember that for futures day trading, a bull market may last only 60 minutes before switching over to a 60-minute bear market. We are talking short time frames here.
What I was seeing in this pattern was a CHANGE from the norm. A change from a repeating pattern in most any indicator is a clue. In this case we had a declining market. If the volatility starts to dry up on the declines and begins coming in on the rallies, it is evidence of a potential future change in trend. Some of the sharpest surprise-surprise futures rallies come after the price action dies on a bear decline.
In this case, the decline came down in two back-to-back sharp volatility peaks, and then died in two dull ones. I call this a double die. This is a big change from the norm and needs to be put in context. Obviously, we would not be looking for a top after a sharp decline, so the market must be getting ready for some base building and preparation for the next advance.
As always, don't hang your hat on only one pattern or indication. You need a series of events building and leading up to the decision. It's a probability-numbers game. Over time, if you take many of these high probability futures trades, the odds will favor you. If you are wrong, try to minimize the loss as quickly as possible. Staying with a bad trade and hoping it will turn in your favor is a losing game. Over time, probability will favor you for taking small losses.
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There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.