While consumers may be none too happy about all the rain that fell in the Corn Belts lately, for those who have been long corn, it’s been raining money over the last few weeks.
While there are more than a few people who speculate or wish to speculate in agricultural futures that just think that you can watch the weather and beat the market with this readily available information, there are certainly times where we get enough weather to cause some real momentum to develop that can indeed be taken advantage of by individual traders.
The current upward movement in corn futures prices is certainly one of these cases. The mistake that traders may make is to look to predict fundamentals, things like weather forecasts or other data that may affect prices, but the problem is that you’re up against players that are much better at this than you could ever be, and that’s not the way to beat them.
Those who actually trade in large amounts of commodities, the people in this case who buy and sell all this corn or other commodity, aren’t going to be scooped on the fundamental side by casual futures traders, or even the larger ones that speculate on this for a living. Fundamentals such as the weather, or things like tariffs, supply shortages, or any other external factors related to the price of a commodity does have an effect upon prices of course, but we aren’t really going to be able to figure out things looking at just these factors.
However, this does not mean that we can’t do well trading things like corn, but if we’re going to do this successfully, we need to approach this from a technical perspective, trading on the trends that develop as all these buyers and sellers battle it out on the futures exchanges.
The price of corn isn’t particularly volatile, especially compared to stocks, but given that we can multiply our returns by so much with futures, we really don’t need that much of a percentage move to make money, and quite a bit of money at that in some cases.
A 5% move in prices over a few weeks can perhaps yield a good trader a couple of percentage points of profit, as we need to realize that we aren’t going to get the top or the bottom and there will be slippage on both sides as we wait for our entry signals as well as signs that the current move is probably over and it’s time to exit the trade.
When we take this 2% gain and multiply it by 10 if you are trading futures and even 20 if you are using contracts for difference, or CFDs, now we’re talking some nice profits over a few weeks. When the move is much larger than this, like the current move in corn is, several hundred percent returns in weeks become possible just trading the daily charts and spending very little time on this.
These trades don’t come around all that often, because the price of corn or other agricultural futures are fairly stable. Over the last month, corn futures are up a whopping 37%, and while, once again, we’d never get the full move, 30% would certainly be realistic. When you multiply that by 10, you get 300% in a month, and when multiplied by 20, we are looking at 600%.
Chart Reading is the Real Stock in Trade for Commodity Speculators
We don’t have to know a single thing about corn to do this well, we just need to know how to read charts, although knowing that corn is in trouble like it has been certainly doesn’t hurt. There’s plenty of money to be made trading corn under the much more modest moves we see though, due to all that leverage, and when doing this consistently, once in a while you will get a huge move like this and make out like bandits.
We need to realize though that if we are leveraging our money 10:1, a move against us of 5% will cause us to lose half of our deposit, and a 10% move will do it in completely. When we magnify our potential returns, we also magnify the risks as well, and we therefore need to really know what we’re doing to shoot for the big returns that commodity trading can offer without doing ourselves in along the way.
What causes these moves, all of them in fact, is ultimately momentum, and momentum is exactly what we like to see as futures traders, and we don’t even care what direction it goes in provided we swim with these tides. When momentum is going against our position, we want to choose to leave before any real damage occurs, but when it’s moving our way, we can keep riding it and keep watching the profits pile up.
Once we’re up, we’re playing with the house money so to speak, although we still want to be aware that these things do turn and we want to be ready for when it does without giving too much back.
The news from the corn fields in this case is on the grim side, but whatever news is going on will make its way to the charts to the exact degree that it affects price. Trading is not a game of looking to foretell the future, like a lot of people think, it’s rather about managing the present, watching things unfold and acting in response to it.
We can also measure the length and magnitude of a trend to see what sort of impact that the behind the scenes action might be having, such as seeing the 15 million acres of unplanted corn right now. This equates to only 86% of corn acreage being planted, in comparison to the 99% we had this time last year.
All this unplanted corn equals less supply, and less supply puts prices up. Even though trade restrictions have hurt corn prices, this makes up for that and a whole lot more, and corn future prices tell the story in glorious detail if you are long corn right now.
While just about everyone confines themselves to betting on things going up and not down, and avoid what is called shorting, borrowing stock from your broker and selling it now with the promise to buy it back later, there is no borrowing needed with commodities or anything traded on the futures or CFD markets, as every contract has a buyer and a seller.
If you are buying a corn futures contract, that side is intuitive, and you are betting the price goes up. If you sell a contract, and take the other side of the trade, you make money if the price goes up and lose if it goes down. It is no more difficult to sell a contract than it is to buy it, and there’s someone there with a bid or offer for you whenever the market is open, on both sides of things, just waiting for you to fill their order with your trade.
Some traders in fact are always in a position with these trades, and are long when they expect the price to rise, and as soon as they exit that trade, they go short the commodity, even though long and short don’t mean exactly the same thing as they do with stock trading.
To trade futures, you need a futures trading account, and while some traders find the minimum deposits, called initial margin requirements, on the steep side, just $2100 will get you in the game with corn. If you live in a country that allows CFD trading, you can get started with even less money.
Trading Commodities Successfully Is Truly a Game of Skill
Regardless of how you trade commodities such as corn, it’s important to know enough about what you are doing to give yourself a chance to do something else but lose all your money. This does not mean knowing anything about corn, but it does mean knowing how to trade it. Not being prepared is how so many budding futures and CFD traders do themselves in, and your deposit might not even get you much of a lesson by the time it is all gone if you do not heed this.
Things move in waves, and nothing here is at all random, and if we can ride the waves successfully, not winning every time but winning more than we lose, there is some real money to be made at this provided that we are skilled enough to do it.
Corn still looks quite bullish even this late in the game, and the market will announce when this move is over in good time. Meanwhile, the daily trend did take a little break for a few days already from June 4-10, but the move is back on now. Given all the positive momentum, if we did get out here, it would not have been that wise to reverse our position based upon this comparatively minor pullback, but instead to sit tight to see what happens next.
Less skilled traders often feel that they should be in something all the time, although the correct approach is to define a market in three ways, enough upward momentum, enough downward momentum, and not enough momentum either way. When we don’t have enough to work with, this is the time to be on the sidelines watching.
Given the break that corn has taken, this may be indicative of the biggest part of this move being over, although we never want to just assume these things, and if we are back on the ride, we need to let it tell us when it is time to go.
Corn can also be traded on shorter time frames than daily charts, but this sort of trading is much more time intensive and really isn’t suited for casual traders, who may only have a few minutes a day to monitor their trades, as opposed to the full-time trading that intraday traders do.
This is a nice example of what is possible trading corn futures, but we don’t want to ever think it’s as easy as this or has anywhere near this much potential very often. However, the way corn has been on fire lately can serve to at least whet the appetite of potential traders, but we really need to realize that you need to make your bones with play money first, and that’s where people need to start until they master this craft well enough to have a reasonable chance for success at least.
Futures trading is a zero-sum game, and we might feel intimidated by who we are sitting at the table with in this game. While we are certainly dead money if we lack the proper skills, when we do acquire them, it’s the hedgers that become the dead money, because their positions are not based upon market activity like ours is, they are based upon business need. When the price of corn is rising like it is, they still need to buy it, but we can pick our spots instead and ride their backs at opportune times like this.
Corn traders who have speculated on the long side lately have seen the money that they have planted in futures corn fields really spring up. Rain can really make your money grow it seems, if you know where to plant it.