This soybean daily chart is a rollback chart in which prices and trading signals are not exactly the same as in the individual contracts. However the buy/sell signals and cycle trading patterns are very similar and this chart shows you how tops and bottoms are traded using the Cycle Trading Patterns and software in Walter Bressert Futures… OnLine.
Trade No. 1 - Trade Recommendation
2/17/98 - Place a sell stop to go short one contract at 675 ¾ (below the red dot) with a protective buy stop at 685 ¼ (one tick above the cycle high indicated by the down arrow). Prices could drop below 658 as the trading cycle bottoms no later than 3/6/98. Dollar risk is $500 (entry price to protectie buy stop).
Outcome: Going short at 675 ½, the position was closed out on 3/6 at 649 ½, labeled No. 1 Exit, for a 26 cent, or $1300 profit. The market was exited based on the mechanical setup/buy signal. A buy stop at 649 ¼ was placed above the purple setup bar.
Trade No. 1 - The Setup
The trading cycle tops and bottoms are indicated by the arrows.
The blue indicator at the bottom of the chart is a weekly MACD plotted on the daily chart. The red oscillator above it is the daily RSI3M3 indicator, and overlaid on the oscillator are the timing bands within which trading cycles top and bottom with 70% accuracy. The blue timing bands are for tops; the purple and red timing bands are for bottoms.
The thick red and blue lines plotted on the price bars are the long-term trend indicator overlaid on the daily chart. The thinner red/blue lines are the daily trend indicator. Both trend indicators are used to determine trend and generate buy/sell patterns. At the left of the chart, the first bottom is the weekly cycle bottom, a 14-week cycle called the primary cycle that determines trend for the daily trading cycle.
Following this weekly cycle low, prices rallied to a trading cycle top at the first down arrow, then dropped into a trading cycle bottom at TC, which begins the count for the first set of timing bands. Prices rallied up to make a top within the blue band. This high was above the thick blue trend indicator line. The downturn in the RSI3M3 generated a light blue sell signal setup bar. However, the weekly cycle is moving up and this would be a high-risk sell situation, which we would not normally trade. Prices dropped below the setup bar to generate a sell signal the following day (which we did not take) at the red dot.
The next day (Day 3 from the cycle top) exceeded the high of Day 2 (the day with the red dot), to form a swing low. Day 4 then dropped below the swing low. This is called a "swing reversal", and is used to help confirm, and trade, trend reversals. The weekly cycle sets the trend for the daily chart, so tops and bottoms of the weekly cycle are trend reversals, which are the most dangerous places to buy bottoms or sell tops on oscillator generated buy and sell signals. But a swing reversal pattern is a high probability confirmation of a bottom or top that can be traded if the dollar risk is not too high.
Trade No. 2 - Trade Recommendation
3/12/98 - Two minutes after the open, place a sell stop to go short one contract at 663 ¾, or one tick below Thursday's low if lower at that time. If filled, place a protective buy stop at 674 ¼. Dollar risk is $550 per contract.
Outcome: This position was exited on 4/9/98 at 624 ¼ for a 35 ½ cent, or $1975 profit. Our protective stop, based on the setup bar, was to wait two minutes then place a buy stop to liquidate at 628 ¼ or one tick above the high of the day at that time, whichever is higher. The high of the day at 633 ¾ was made in the first two minutes of trading. An intra-day email or fax recommendation would have been sent to lock in a profit with a buy stop one tick above the high of the day at 634, OCO a buy order one tick above the high of the setup bar at 624 ¼ that was filled.
Trade No. 2 - The Setup
Following the liquidation buy signal and cycle bottom for Trade 1. Prices rose to make a top above the thick red line of the long-term trend indicator, testing the thick blue line of that indicator. On the close of that high day, an oscillator (not shown) turned down generating a setup bar for a sell signal. There are two types of sell signals on this chart. One sets up with a green bar; the other, based on the RSI3M3 at the bottom of the chart, sets up with a light blue bar. This high and setup bar was below the preceding trading cycle high, indicating a downtrend, and the red line of the trend indicator is below the blue line, also indicating a downtrend. Therefore, the trend is clearly down, and a high probability sell signal will be generated when the low of the green setup bar is taken out.
Notice the tops at A and B as prices rise above the thin red line of the daily trend indicator. The first high at A was a setup bar, the high at B was a swing high, but not a setup bar. At both of these tops intra-day Cycle Trading Pattern sell signals could be used to establish additional low risk short positions. (Intra-day Cycle Trading Patterns could also be used to lower dollar risk at the tops of the trading cycles at sell 1 and 2.)
Trade No. 3 - Trade Recommendation
4/15/98 - Place a buy stop to go long two contracts at 634 ¼. This is two ticks above the swing high of the swing reversal pattern. (Trade No. 2 exited on this day). If filled, place a protective sell stop at 621 ¾ (one tick below the cycle bottom). This entry is a high-risk trade, as it is a trend reversal signal. Exceeding the swing high will indicate the bottom of the 14-week cycle is most probably in place. Our minimum price objective for the top of the weekly cycle is 658, a 38% retracement of the move from the previous cycle high to the recent cycle bottom. Dollar risk for this trade is $675 plus commission and skiddage.
The seasonal bottom is in place and a rise above 634 ¼ will confirm the bottom of a 14-week cycle that could be followed by a rise to 730 - 800 as the seasonal tops in late June or July. We will look to take profits near 658 on one contract and hold the other into the seasonal top.
Outcome: Prices continued up above the thick red line, went above the thick blue line and exceeded 658. With a waiting liquidation order to sell at 657 ½ this trade would have netted a $900 profit on one contract, and the second remains open with a profit objective of 730 - 800.
Trade No. 3 - The Setup
Prices dropped to new lows and rose up to generate a buy signal to take profits on our short position on 4/9. We have been selling rallies into lower trading cycle bottoms. Prices are now 14 weeks from the bottom of the previous 14-week cycle bottom. Therefore, we would not place an order to go long above the high of the purple setup bar, only to take profits. But a swing reversal 14 weeks from a previous cycle low can be a strong indicator of a cycle bottom. A swing high was made the bar following the purple setup bar. Anticipating a trend reversal, we would recommended placing a buy stop to go long one tick above the swing high for our No. 3 position.
At the high of this cycle, there was a sell setup bar (green) generated, as well as a second sell setup bar (light blue). However, since the weekly cycle has bottomed, our expectation is that prices will drop into a trading cycle bottom above the recent trading cycle low and probably above a 62% retracement at 636. The trend indicator for the daily chart is up, and the weekly chart had a buy signal to indicate a bottom two weeks ago, so we did not look to go short. We will be looking to buy into this market with a two-contract trade as the trading cycle bottoms.
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Next: Overview of Indicators for The Three Trades
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