Looking back at the big picture, I realize that I have contributed to the sad business of making marketing look so difficult that it is just beyond the means of ordinary farmers to master. I have been so excited about measuring and monitoring the improved performance of technical indicator strategies, that I left the impression that the math, computer coding, and strategy selection are very complex, difficult, and time consuming. While some do this to establish a fear factor and amplify the price risk danger in grain & livestock marketing, that was not my intent. The goal was and is to build farmer confidence to be able to distinguish between “fear and hope” marketing and quantitative methods that can be easily understood, verified, and applied.
To correct the errors, let me summarize how easy it is to switch from untested fundamental projections to probability based technical indicator strategies. First, there are many technical indicators, but one of the easiest to understand and work with is moving averages. While there are many to choose from, let’s settle on one pair, the 5-day (MA5) and 35-day (MA35) crossover. If you want to sketch this out on paper, create three columns for the closing contract price, and the two moving average calculations. That is the only input you need to get started – contract closing price, 5-day average, and 35-day average.
Next we need a specific goal and decision rule. I suggest the goal be to maximize the revenue over multiple time periods by protecting price when the price trend turns down and lifting or offsetting the hedge when the price trend turns up. There are more details in the corn, soybean, and wheat articles on the SelectiveHedging.com website, but a down trend is defined by MA5<MA35 and an up trend is defined by MA5>MA35. Obviously, that simplifies the search for a trend change signal to when MA5 crosses down through MA35 or when MA5 crosses up through MA35. Add two more conditions and the basic decision rule is complete. MA5 must be less than MA35, and MA35 must be down to go short, or up to go long.
If you are using the three column paper version, record the contract closing price, calculate the two moving averages, search for where MA5 and MA35 are both down and both lower than yesterday. Confirm that MA5 is less than MA35 and you have the trigger for a trend change from up to down. If you prefer a spreadsheet, it will do the MA calculations automatically so you can go directly to determine if all the conditions of the decision rule are met. If you prefer using charts, the price will already be entered, and the MAs will be calculated. Check directly for the crossing and confirm if the other rules are met. That is all that is needed to trigger an action signal. The articles on the website go on to describe how to record the hedging gain or loss at each signal, and to accumulate the total for the year, but that information is not needed to trigger a signal.
I have been asked many times to show graphic solutions of the decisions. The easiest way is to look at a chart at the point specific signals were triggered and verify that the conditions of the decision rule were met. Here are specific examples from each of the last five years to check out when sell signals were triggered for the 5/35 indicator: WZ20 2/11/20, WZ21 11/15/20, WZ22 12/15/21, WZ23 11/25/22, and WZ24 11/27/23. What condition or conditions existed the day all five of these signals triggered? What will the conditions be when the next short signal triggers?
Posted by Keith D. Rogers on 14 December 2023