There are a number of valuable numbers notes to keep in mind when trading futures. Futures markets behave in some very reliable patterns in regard to certain general price levels, and keeping these price patterns in mind will help you obtain maximum trading profits.

Here then, are a couple of the most trustworthy “laws of numbers” for futures traders:

1 - Long-term highs – when penetrated – become long-term lows.

Price levels which have served as a sort of market “cap” for several years, if penetrated, then tend to become a base low that will likely support the market for years to come. Since gold prices finally rose above $500 an ounce in late 2005 (for the first time in well over a decade), there has been no looking back from that point forward. If you bought gold when it crossed $500, and placed a stop-loss order just a bit beneath that level – you have enjoyed a trade which has done nothing but become more and more profitable over the past two years, with never a serious threat to your being stopped out of it. The $500 level has been, and should continue to be for the next several years, the effective “floor” in the gold market.

2 – Futures markets love “even”, or “par”, price levels, and will nearly always rise above those levels if they get within striking distance of them.

Futures prices may ramble up and down within a trading range for months on end, but will virtually always clear any “significant” price points that they manage to get close to. If gold rises to $690, you can safely bet that it will go to $700; If cotton clears 59, it will go on to clear 60; Wheat at $3.90 is a virtual lock to soon become wheat at $4.00. Being aware of this tendency of markets to gravitate toward nearby “rounded-off” prices can be very useful for selecting a “take profits” point in your trading. Example: Assume that I’m long wheat futures, and the current price is $3.91, but I suspect that there may be limited remaining upside potential in the market. Therefore, I’m looking to take my profits at the best possible price, or at least to very closely protect the profitability of my position. I would expect, and thus wait for, the market to at least rise above the $4.00 level. Once that level is penetrated, I would likely run a very close stop on my position, somewhere around $3.98. If the market is going higher, it will probably maintain itself above $4.00 – but if the market can’t hold above that level, then a significant reversal to the downside is possible, and therefore I would be well out of my long position at $3.98.

3 – Some markets tend to either strongly hold – or completely fill – gaps.

While gaps in some markets are equally likely to (a) hold, (b) disappear, or (c) partially fill, there are other markets – such as cotton and cocoa – where gaps have a significantly greater tendency to be an all-or-nothing proposition – where option (c) is a very, very unlikely outcome. If, for example, a 50-point gap is established in the initial trading of the day in cotton, one can expect that gap to either hold fast, or to completely collapse and be filled in. What is not likely to happen is a mere partial narrowing of the gap. This is particularly true in a daytrading time frame. Knowing this can allow you to enter a gapping market with very limited risk, because you can safely run a very close stop-loss order. In markets that have this tendency, the odds are very high that the price gap will either remain solidly in place, with no new low established after the first few minutes of trading – OR, if a new low is established, even by just a single tick, the odds are equally high that the gap will be completely erased by the end of the trading day. There is rarely a compromise settlement in which, say, a 50-point gap narrows to a 25-point gap, but then holds that new, smaller gap. Rather, if the 50-point gap becomes a 45-point gap, the gap is virtually as good as completely erased at that point. Knowing this has saved me a small fortune over the years, by allowing me to exit losing trades with the loss of just a few dollars per contract, as opposed to suffering a loss of a few hundred dollars. I have witnessed this pattern most reliably, as noted, in the cotton and cocoa markets. It is not usually applicable to the metals markets, pork bellies, orange juice, or grain markets – the grain markets especially tend to probe gaps, often narrowing them a bit, but still leaving some gap in place.

All futures markets have certain patterns of price movement. I advise traders to carefully study both the intraday and long-term price movements of markets they trade regularly. The knowledge gained from taking the time to learn a market’s behavioral tendencies is, literally, worth millions.

Categories: Uncategorized