The pursuit of 7-dollar corn futures has been an emotional one. The FOMO (fear of missing out) is alive and well. There have been phone calls daily about how people want to take advantage of this bull run. Since no one wants to get caught with buying at the top or get caught with buying on the 7th consecutive day higher only for day 8 to be a violent 20 cent drop. Followed by another 20 cent drop to find out support is still 35 cents away.
Yeah… this is a real possibility, and the volatility will only continue as the limits of corn futures and soybeans get expanded.
No doubt this is not a time to get overleveraged while you speculate in these markets. I had a conversation with a broker in Chicago about a month ago. A very knowledgeable person. He spent quite a few years working in the pits in the livestock markets. One of the things I wrote down from our conversation was, “don’t let the margin dictate your trading”.
He said that there have been multiple studies done on what are some of the keys determining factors that separate spec account that make money and ones that lose money. One of the factors was how leveraged the account was. His example was if you have $20,000 in an account don’t go buy 3-4 contracts of cattle, use one. You need to have staying power in the market.
Too many times people only want to put in just enough to get the positions on. I am telling you right now, this is not the market to be running accounts thin and getting extremely leveraged. If you are using over half of your equity just to get positions on, in my opinion, this would be an example of getting too levered.
One way to combat getting too leveraged is to utilize options. I have been utilizing a lot of options lately. It is a good way to build confidence in your position. Sometimes I will compare it to a look into the future, “what would you be willing to spend to get a look into the future”. If you called and said you wanted to buy a corn contract. I would ask “Are you willing to risk 50 cents? “. Most of the time it’s no, so then I will go in and pull some quotes on options and we can usually get something that will fit their risk tolerances.
Corn Futures: The Strategy
The grain producers I work with have all heard me reference the model that I have been following during this market run-up. I have been following an “Elliot 5 Wave” sequence during the last 6 months. This model has helped me sleep at night while giving my producers a fighting chance at squeezing everything we can out of the rally.
I recall last December having a meeting with a client and their bankers, prices were at levels that were considered top 1/3 of the past 5 years. The bankers were interested in getting floors set for the upcoming crop year. At the time it would have been easy to get floors set for the producer and be done marketing. This was $1.37 lower than today’s board price. Multiply that by just shy of 2 million bushels, think of all the opportunity that has been captured. Add in $2.50 on soybeans. I think the producer is happy with the 5 wave strategy.
If you are looking for some extra help for marketing your grain on your farm you can give us a call or swing over to paradigmgrain.com and check out the website and line up a time for a free 30 min assessment to see if the program and the offerings would be a value to your farm.
The past 5 years limit orders have been popular while selling corn futures. The market didn’t seem to have too much of a reason to run too high and the rallies were very short-lived. During this run-through, we have utilized stop orders below the market. These can be frustrating since if they fill it’s on a down day. The purpose of this is to know where the big money is going to liquidate their positions. This will continue to be important as more outside money comes to play in the grain markets.
It is important to know your worst-case before you enter a trade as a speculator. Using this 5-wave pattern will help identify your risk parameters as you enter and exit positions. I find it extremely helpful and I am happy to help my clients work through these patterns. Click here for other grain futures that you can trade through RGC Commodities.
“Trading commodity futures and options on futures involve substantial risk and may not be appropriate for everyone. Past performance may not necessarily be indicative of future results”corn futures