A Grains Trade You Can Bank on

05/27/2011 3:00 pm EST


Hubert Senters

Founder, HubertSenters.com

Soft commodities like corn and others often follow one another, so when one hits its upper limit, it presents a very high-probability set-up in related markets, explains Hubert Senters.

Well futures traders are familiar with limit up and limit down, but if you’re not familiar with that market, there are some things to consider when you’re trading those markets.

Our guest today is Hubert Senters from TradeTheMarkets.com. Hubert, what are we talking about, first of all, when we’re talking about limit up or limit down?

So limit up, limit down move: There’s only a certain amount of cents that corn, soybeans, and wheat can actually move in a day—in a range—so once they do that, they don’t lock; that’s as high or low as they can go. 

There’s a really cool trade that you can do around the ags (agricultural commodities). Let’s pretend that the limit move in corn is, say, 60 cents. So as soon as corn goes limit up, it’s not allowed to go any higher. 

Now it can trade back off, but the likelihood of that happening is very low. There’s a cool trade that you can do (and) you get wheat or soybeans long, because they will probably follow the corn trade.

That’s happened recently where this trade has been a possibility, right?

It doesn’t happen a lot, but it’s a real high-probability trade and it’s really easy to do.  

All you have to do is figure out how many cents up every day that corn, soybeans, or wheat needs to go limit up, and just put your horizontal line as an alert and it will let you know that it’s about to happen.

Is this because one will follow the other almost inevitably?

Exactly, like if you’ve got corn that goes limit up, wheat will probably also follow, and so will soybeans.

Alright, and what else on the chart should I be looking at to decide if this is going to happen or predict this happening?

It’s pretty much just a good old price action trade. I mean, if you think that a 60-cent move is about to happen, if you have a horizontal line ten cents lower than that, there’s a good chance it’s going to move another ten cents and go limit up on 60 cents.

So if I’m an equity trader Hubert, only used to trading stocks, how do I get involved with this? What outside of those markets or even inside should I be looking at and be aware of?

So a couple of things you need to be aware of:  If you’re going to go on a limit move to the upside on corn, soybeans, or wheat, you want to be on the long side of that—not the short side. 

If you see corn cruising higher, don’t short that on a limit-up move. You’re going to get stuck in that, and you’re going to have to hold that overnight, and you’re going to have some overnight exposure. 

Limit up long, limit down short; just remember that. You’ll forget it one time and it’ll cost you and you’ll never forget it.

Now if you’re going to trade the ags, you need to pay attention to the grain report, whether it is a supply and demand type of thing.

If you’re not comfortable trading futures, you an always trade Monsanto (MON) or Potash (POT). They’re equity trades— they’re not going to move one-to-one—fertilizing companies, but if those commodities start to move, those equities will also move pretty well.

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