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Trade Setup In Oats


Oats are trending lower. A simple trend following strategy is to enter short on a pullback as the price nears a former swing high.  Some traders watch for a pullback to the 61.8% or 78.6% Fibonacci retracement level, others use a trendline or moving average. While the exact entry point varies by trader, the region oat futures (ZO) are currently in (relative to its overall trend) is often a high probability trade area.

Another variation of this strategy is to wait for a consolidation (can be used in conjunction with the above methods), which shows the buying has slowed. Between March 15 and 17 the price has moved predominantly sideways, providing the start a consolidation. Let the consolidation form for at least three full days, preferably more. Mark the high and low of the consolidation, and then enter a short trade if the price falls below the consolidation.

Currently the consolidation in May oats is between 199.5 and 194, as of the morning of March 17. As indicated though, this consolidation should be allowed to form for the rest of the day, and preferably another. Therefore, the current consolidation high and low may change.

Figure 1. May Oats - Daily Chart

If a short trade is triggered, a stop loss is placed just above the high of the consolidation. A target is placed at 174, just above the former low (171.75). Placing a target below 171.75 is more aggressive, and assumes the price will make a lower low (which downtrends tend to do).

Trades like this typically offer attractive reward-to-risk ratios. If the setup stays similar to what it is now, the trade offers about a 3:1 to 4:1 reward to risk.

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