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Sell on rally!

11/17/2011 @ 11:40am

Grain price seasonal patterns and monthly trends provide endless opportunities in cash grain marketing. Each day, I get a call that asks the question, “When is the best time to sell my grain?” I answer, “There are too many to list!”

Traders and sellers of grain who exercise basic patience and money-management skills are the most rewarded in the industry. Too often, we see the unprofitable trading patterns of those who use emotions for their trading and marketing practices.

The world of grain continues in a situation of a tight supply/demand balance. Fundamentals suggest price swings certainly will continue to be extreme.

When the market price of grain is rallying, people become confident and develop a false sense of security with profits. Farmers – especially – become fearful that if they sell now, they will cheat themselves out of more profits. The natural emotion of greed keeps us from more practical and eventually profitable practices of hedge management.

These billion-dollar index and trend-following funds (which don't know a bushel of corn from a phone booth) that have 90% of their trading decisions derived from chart patterns, see the market merely as a profit-taking business.

Funds buy the breaks and use their massive financial clout to make the price movement, which, more often than not, is a greater swing than underlying fundamentals of supply and demand would suggest. The big funds make the profit, then they take the profit. When they buy, they also immediately look for their exit point.

“If you don't take your profit, the market will.”

Income for managers of the primary funds comes from bonuses paid on profits taken before the month's end. This makes taking profits or selling the rally an easy decision. Since these massive funds control all the large price swings, you have to use the same trading psychology and management principles.

Here are the two best trading principles I've learned from these large fund managers:

● It's a profit-taking business.

● If you don't take your profit, the market will.

Which means, rallies don't last forever. Someone is going to take a profit!

The volume of trading is large, and traders make considerable money on the near-term weekly and monthly moves. Small traders need to remind themselves that when they make $1,000, someone else has made a million. This volume sets up regular monthly patterns of rallies to lock in. The same goes for seasonal patterns.

Let's address the yearly seasonal. Producers who can store grain have received huge rewards. In 2008, when index and trend-following funds and their massive dollars entered the scene, they created what was to be the beginning of our large yearly price swings. Corn went from a January low of $4.75 to a June high of $8 on the December futures. That was a $3.25 rally. The 2009 low occurred in February and increased $1.50 to the high in June.

The 2010 low was almost a six-month low, with a trading range from January to June 1 of not higher than $4.20 nor lower than $3.70. It was a 50¢ up-and-down trading range before a sudden drop at the end of June to $3.44. That was followed by a July-to-November rally to $6.08, or a $2.64 rally on the December futures contract.

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