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Trading the Meats

The following discussion is in response to a question that came in about trading in the meats. It may not be of interest to everyone, but maybe you will learn something you never thought of before. For example, I was never very interested in selling naked puts in the stock market. One day I met a man who was making a lot of money trading that way. I listened intently and today, selling naked puts in the stock market is one of the major ways I trade.

Sometimes it is quite a struggle trading in the meat futures, especially lean hogs. Meat futures often tend to have a 50% to 70% daily and weekly-range overlap. This means 50% of one day's or week's range will be found in the next price bar.

Try to buy on the bull market dips below the previous day's low, and near three-day lows. Avoid day trading cattle and hogs without longer-trend time and price objectives. Slippage in these markets can be terrible, Bellies being the worst. Bellies should be day traded only with stop limit orders at time of entry. Belly fills are almost as bad as coffee fills, which are often very bad. There are six traders who can dominate the meat markets with their buying and selling pressures, and move the markets like a champion yo-yo professional.

If you like to trade the meats, test the following method: note how much today's high exceeded the high of the day before it, and try to buy the market an equal amount of points below the most recent trading day's low. Example: Let's say that day Two exceeded the high of day One by 40 points. Then try to buy the market tomorrow 40 points below the low of day Two. Next, try this same method for weekly bars.

Meat market traders might consider keeping intermarket spreads between hogs and bellies, or cattle and bellies, then analyze the markets individually to denote different major trend reversals for these markets. There are some traders who make an annual income trading only the hogs and belly spread. Pork Belly contract months August and February (of the next year) create weekly chart gaps that skew price data and make some types of historical price testing impossible. Real time data is required to overcome this disparity for testing. Spread only the same contract months on inter-market spreads, unless inter-market spreads have been analyzed and reveal that you should do something else. When deferred hogs are gaining over the nearby contract, and nearby bellies are gaining over deferred contracts, stay with the most active months of long bellies and short hogs.

None of this is to suggest that you trade bellies at all. I will not touch them with a ten-foot pole under any circumstances. I find it much easier to trade live cattle-live cattle spreads, live cattle-feeder cattle spreads, lean hog-lean hog spreads, and live cattle-lean hog spreads.

If you are not familiar with spread trading, you are truly missing out on some of the lowest risk, consistently profitable trading opportunities. Over the years I have earned far more profits by trading spreads in the meats than I ever have by trading in the outrights.

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Saturday, 22 June 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.