This article starts from a very simple “off the shelf” marketing plan for farmers who want to transition from traditional price target based plans to trend based plans, and walks through the steps to modify and improve the marketing plan as interest and needs change. Note that the basic plan can be in operational on paper and fully operational in four steps described on one page. There are many components to a well designed marketing plan, so let me make it clear that this article is focusing only on how to make the decision on any given day to sell, hold, of change positions. This is not an attempt to suggest that anyone needs to change what they are doing, but it is a road map to start moving average sales from the bottom 30% of the price range to the top 40%.
The focus of the design is on moving average crossovers as the action trigger because it links in with something everyone is familiar with, and it is transparent. One of the biggest criticisms is that trend systems will only work in trending markets and produce whiplash (false signals) in range bound markets. MA systems don’t have the corner on false signals, but it will be addressed in context.
Step 1. Simplicity and transparency are the main reason for focusing on an MA based plan. All that is needed to implement the system is a piece of paper with 3 or 4 columns, access to daily closing prices to be entered in Column 1, calculation for 5-day MA in C2, calculation for 35-day MA in C3, and an optional calculation of the difference in C4. Since there are now spreadsheets for computers, iPads, and cell phones, the obvious leap into modern time would be to put the format on a spreadsheet so the only daily entry would be the closing price, and the rest of the calculation would be automatic. I suggest starting with paper or spreadsheet because it gets you involved more directly than just looking at a chart.
Step 2. Accept that MA35 is going to be designated as the long term moving average. Pick your own if you have a favorite, but pick one. Other averages will work, but backtesting verifies that MA35 tend to work across a broad spectrum and is responsive enough to make timely decisions while helping to suppress the number of false signals.
Step 3. Verify that MA5 will be above MA35 a majority of the time when the trend is up, and below when the trend is down. That crossover provides the sell signal when MA5 crosses down through MA35. To minimize false signals even more, ignore the crossover if MA35 is still obviously trending up, but be on alert that MA35 may turn down because price has most likely also fallen below MA35 and will begin to pull MA35 down also.
Step 4. Move up to an interactive chart where the two moving averages can be added, and the daily requirement to monitor and execute the plan is the few seconds it takes to look and see if MA5 is still above MA35 to maintain and open position, a crossover that triggers a sell signal, or the trend has been down and MA5 is crossing up through MA35 where you may want to protect the hedging gain that has been4. accumulated. Seconds, my friends, seconds per contract.
COMMENT: With these basics, the plan is in place to decide when to make sales. Does the plan guarantee that you will cover CoP and CF above CoP? No, and neither does any other system unless price is above the critical level when you are buying inputs and you can lock in a known profit. Will the plan get your average sales in the top 20% of the eventual price range? Probably not, but it will provide guidance to avoid sales that bring many farmers down to the bottom 30% of the price range up to the top half of the price range. Will the plan cover CoP and CF? Maybe not, but if it maximizes the price that was practical to achieve under current conditions, and no other plan is going to do any better.
Much of the second half of the Hedging Works: Myth or Reality book was written to show exactly how to move smoothly through Steps 1-4. Specific articles were generated from the book and published here on the SelectiveHedging.com website 8-10 years ago to help make the information more widely available. If you want more information, you are invited to visit the website to go back through the archived articles to early 2013, and then work forward for several months.
Step 5. There is a sequence of events that will happen to turn from a bull market trend to a bear market, and vice versa. On the way up, price leads MA5, MA5 is above MA35, and all are moving up. On the way down price leads MA5 from the bottom side, MA5 is less than MA35, and all are moving down. It is no secret what those events are, as price turns down and drops through MA5. Both continue to fall until they drop through MA35 and MA35 turns down. Many folks want to argue that there is no clue the trend is changing. Wrong! That series of events has to happen at the top and bottom of every rally. If the turn is extreme, they could all happen on the same day, but that is highly unlikely. I should add if the goal is to trigger a sale at the absolute high price or before the prices begin to move down, this plan is not appropriate for you. The guru who taught me the basics, said “If you only take on thing away from this session, remember to make the market show you the top and bottom.” Clearly the instructions were to have a firm action trigger in mind, and to have an even firmer commitment to execute the signal after tops and bottoms have been made if you want to be successful at hedging. I could go into more details, but there are events that provide early alerts that a trend change is developing. Again, if you want to set price targets in the winter and check on the sales plan 18 months from now, tracking trends is not for you. Superior marketing requires daily attention when decisions are approaching, and you either need to accept responsibility or hire a stand-in, but make sure the stand-in is executing your plan.
Step 6. Add Fibonacci extension and retracement capability to your toolbox and charts. While Fib numbers appear to be subjective because they can be anchored at many points in the chart and other reasons, they are still quite objective, and math based. Most marketing folks are familiar with 50% retracements after the market has had a strong run but still has energy to go further, but totally unaware that 50% is the midpoint between two powerful Fib #s, 0.38 and 0.62. Retracements of 25% and 75% are also useful in limited situations, but don’t get bogged down in details. Many folks are not familiar with extensions where 1.62 and 2.62 are most useful, followed by 0.62, 1.00, and 4.25. If I could retain only one tech indicator, this is it.
Step 7. It is time to step off into some modifications to refine the decisions. For this you may have to do some research or consult with a professional to obtain proprietary information about how to modify the decision rules. How can you change an MA calculation? There are other forms besides the simple moving average suggested above. Some improve the performance, and some do not. It is even easier to refine the rule. Instead of defining a turn down of MA35 as an absolute, the actionable rule may be that MA35 will not be recognized to have turned if the change is less that a certain number of cents or a certain percentage of the price. For the same reason, instead of the crossover being absolute, it can be defined as MA5 crossing by a certain number of cents or being below MA35 for a certain number of days. Yes, the possibilities are unlimited, but remember this step is only to make refinements to deal with the actual crossover. The trend is up while MA5>MA35, and the refinements will be of no significance.
COMMENT: Too many folks get involved in all the potential whistles and bells at this step when they try to understand a new plan. It is true that the more you understand about how a plan works, the better chance you have of achieving higher average sales. It is just fact that if you don’t build the foundation in Steps 1-4 before moving to the refinement stage, the complexity tends to overshadow how much a simple plan can do when executed properly. Trying to squeeze the last few cents out of a plan has some very serious consequences which may not surface unless you have access to software that allows you to backtest the plan with historical data.
The advice to farmers who want to ease into trend based marketing is to work with Steps 1-4 until you are convinced that the plan will work for you. Other indicators than MAs can be used also, but 40 years later I just haven’t found any that do any better for those making the transition from price targets to trend changes. It is nice to talk about all the other tech tools on the charting package (several thousand when you consider variations) just like it makes a good impression if you can talk about all fundamentals that are affecting the markets. Just for trivia purposes, if anyone says they are using fundamentals to make basic action decisions, you know that it is highly unlikely that they can provide documentation of performance because they were using subjective input that can not be reproduced for backtesting, a few exceptions acknowledged.
Step 8. Learning a new paradigm. Let’s face it, documentation of performance is not about how somebody’s plans or models work; it is about building confidence that there are patterns of market behavior that can be used to make timely hedging decisions, and whether those concepts can be translated to objective indicators to assist in critical market decisions. As experience with marketing plans mature, the next logical step is to want to build an analytical structure that allows you to test plans, evaluate modifications, and build understanding of the internal uniqueness of each plan. It does not take rocket science to do so, but it takes time, and the payoff is great. What distinguishes my work from others is that I made it to Step 8 by necessity and invested the time to build the search engines that do the job. Not offered to pat my back, but to say that the difficulty was conceiving the model design and certainly not filling in cells in a spreadsheet. Not everyone is willing to spend the time to figure out how to manipulate a simple moving average to go from very disappointing results to average prices high in the percentile price range, but the benefits are obvious.
There are articles here on the Selective Hedging website which deal with raw data models (unmodified) and modified models for corn, soybeans, and wheat, harvest and storage examples, and five years of performance for each. The tables include a significant number of indicators that are routinely used to compare performance of trading plans and programs.
Posted by Keith D. Rogers 19 April 2022
