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Favorable Risk/Reward on Long Wheat Trade

Since putting in a low at 480 in September, wheat futures (March) have been pushing higher, reversing the prior downtrend.

December saw a sharp rally followed by a sharp reversal, yet the multi-month uptrend remains in place. The December reversal offers a favorable reward-to-risk trade.

Figure 1. March Wheat ($ZW_F) - Daily Chart

march wheat.jpg (1)

By entering long between 595 and 575, a stop loss can be placed just below the December low of 572.75. Depending on entry, maximum risk is about 23 points. Take profit near the 650 mark to lock in a profit, on at least part of the position. Implement a trailing stop on the rest to potentially profit from a further rally if the uptrend continues. Even if the entire position is exited at 650, that's a 60 to 75 point gain for 23 (or less) points in risk.

While the reward-to-risk ratio is favorable, losing trades still occur. Only risk a small percentage of account capital on any single trade.

If the price falls below 570 the current uptrend is drawn into question, and speculative traders are likely best to step aside until a trend establishes itself once again. On a seasonal note, wheat tends to decline in January.



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