Those traders who use trend models have been shorting cotton and taking profits for a couple of weeks. The prices started going down on October 22nd and have been declining ever since.
Apparently, this is not the first time cotton prices have made such a large move. Still, now it is a little bit too late to sell the commodity. Well, if you still want to sell it, make sure this is a short-term trade. However, it is dangerous at this point, since the prices have been showing a continuous decline for 10 days in a row. Then let’s add to it another 8% decline seen during the 2 previous weeks and the RSI readings (around 8) and we will get a n extremely oversold market.
At this point, it would be wiser to open a long position at the existing levels. You can place a relatively tight stop-loss in case the price continues the downtrend. At the same time, it is necessary to define several upward targets. Reduce exposure at every target hit. Once you hit the first target, you reduce the exposure so that it could get breakeven. 2 targets increase the efficiency of risk management.
The thing is that we assume that the price should recover sooner or later. If the price starts consolidating after a week has passed you may close the trade since the conditions for purchasing the assets won’t be as favorable anymore.
Let’s consider an example of such a trade.
The entry point is the current price around 77,45. You purchase the December cotton futures.
The stop-loss level is pretty tight – 75,4.
The targets are 79.3 and 80,2. Reduce your exposure by 50% once the first target is hit. The trade is closed completely on reaching the second target.
The time range is around a week on average.
The first chart below indicates the entry points for bearish trades within the scope of the mentioned strategy. They paid off relatively fast. However, now (10 days later) when the price have come a long way down, the probability of a recovery increases. At the same time, if this is the case, the recovery will give way to new short trades.
Источник: CSI Data
Источник: CSI Data
