Trading breakout setups is the “bread and butter’ of my trading. Breakout setups point out markets that have coiled up and may be poised for a sharp move-the kind of move that short term traders should look for.
There was a breakout setup in the coffee futures today. Back when coffee was traded on the floor, I didn’t trade it much. The CSCE (Coffee, Sugar, and Cocoa Exchange) was notorious for slow fill reporting and price slippage. Nothing like waiting a long time for a fill, only to find out that you got hosed in the process. When you combined that with the volatility in coffee it really was a market for the brave.
Trading in the “softs” has improved a lot since trading moved to the screen. Fills come back instantaneously, and there’s a fraction of the slippage we saw when floor brokers were filling your orders. For me, this has made these markets a viable trading vehicle. The principles for trading coffee are the same as for the eMini S&Ps.
Below is the daily chart for the September coffee futures and today’s Trade or Fade Report for it. Yesterday was a breakout setup bar; it was an inside day and had the narrowest range of the previous seven sessions.
Good breakout setup yesterday
Trade or Fade identified the setup
For breakout points on the upside I normally look at the previous day high and low. In this case, as Tuesday’s high was a swing high and just a bit higher than yesterday, I wanted to wait for the higher price for confirmation. I also drew the 50 percent retracement of this month’s trading range; it was likely to be resistance (and a potential breakout point) on rally.
The 5 minute chart below shows how the market traded today. About the time I got into the office it made a high at 173.60 then had a pretty big decline. When markets have breakout setups, I like to take breakout trades when they make a second pass breakout entry. Part of the strength in breakout trades come from traders who get trapped on the wrong side of a breakout, so a second pass often ends up trapping more traders, making a second pass move more dynamic.
The second pass got it
Given coffee’s early session structure today, I looked to get long if the first high of the day was taken out-a second pass entry. At that point anyone who shorted overnight would be sitting on a loser, making it more likely they would cover.
A long entry was triggered around 8:25 AM. Within 10 minutes it rallied to 177.75, a move of $1556.25! I also drew the green line at the second Trade or Fade resistance; I watched that as a profit target.
Breakout setups are great patterns for futures traders to monitor. Looking across a wide variety of markets helps you find opportunities where you might not otherwise look.
For more information on trading breakouts in futures, visit the Trade or Fade home page here. For an in depth description, order my Breakout Futures Trading Method book here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
