Entering a commodity futures market correctly keeps the risk of loss to a minimum when wrong. Exiting a market correctly gives you the maximum profit when right. If we can keep the times we are wrong to small losses, we have won half the battle. Here's a classic entry method that can be applied across all time frames.
A very smart and famous commodity futures trader once said you can make a living just selling double and triple tops or buying double and triple bottoms. I would agree with him. I’d like to show you a commodity trading technique that takes this idea a step further for better confirmation.
Take a look at this S&P 500 stock index futures weekly chart by going to the link at the bottom of this page.
You will see a big bear market bottom in the middle of the chart followed by a big triple bottom and then a big rally up. Most bear markets don’t end with a sudden single spike and then start going straight up. Instead, they make a series of bottoms at or near the same level. This is where the big commodity futures traders start accumulating their lines. The BUCKS method attempts to label this triple bottom and give it a structured pattern for you to use.
It’s a mistake to expect the same pattern scenario every time. Any commodity futures market will make a different style top or bottom each time to fool the majority. It’s the Elliott rule of alternation at work. The pattern alternates even though the general results are the same. I like to label this pattern with the five letters from the word, “B-U-C-K-S”. We use this acronym because this formation can often signal a high probability trade generating substantial bucks - if it works out. Many experienced commodity futures traders have their own version and name for it.
The B-U-C-K-S method can be used for any time frame. It obeys the rules of fractals, meaning it appears in big or small time frames, from one minute to weekly commodity futures charts. In fact, if we took the time scale off this chart, you could not tell if the BUCKS formation was from a one-minute or monthly bar chart.
Take a look again at the chart. The “B” label is the panic spike. Look for the panic clean-out where the last long holders throw in the towel to sell. The “U” is the first rally. It usually has some good buying but is often just a sharp short-covering rally. The “C” is the sharp decline that sometimes takes out the previous low, but quickly recovers in a wide range. A classic key reversal may occur here along with some serious quality buying. The “K” marks the first good rally that will often take out the previous “U” rally high. Then comes the “S” decline.
The “S” move is very critical to watch. The ideal futures price action is to see an anemic decline to support onto the previous highs of the “U” rally. This is a good indication that the selling has dried up and the market has finally tipped its hand for a big bull market to come. Buy into this “S” dip with confidence. Pick up your position into whatever weakness you can get. You might even average down a little. If the futures market keeps declining and takes out the lowest low from the previous B or C declines, then look to liquidate your position on a small rally back to these old lows. This should keep the loss reasonable.
However, if things work out, look for an explosive move up that will often carry the futures market a long way. Then use a cycles forecast to estimate the time frame of this bull move. If the market cooperates and produces clean swings, you can also start hedging the rallies to help hold on for the big swing. Having a flexible but structured plan like this is important to your success. You need to identify the market’s current pattern and use the right tools.
The B-U-C-K-S Method can be used with commodity futures TOPS too. Simply reverse the description above. Generally, commodity tops can be much more volatile than bottoms, so you usually need to give the market more leeway when using stops.
The overall idea here is to identify low risk opportunities and let the market come to you. Sometimes the formation will skip the "K" or "S" swings making a double bottom instead of a triple. Stay flexible and have no rigid scenarios. By making the market prove itself first through a series of tests and bottoms, you are stalking your commodity trades like a professional.
If you look back over futures chart history, you will find that to support a major move of any time frame often requires a B-U-C-K-S formation that has at LEAST as much time invested as the duration of the next move. On a weekly chart like this, a B-U-C-K-S formation can sometimes forecast a multi-year move. This method can be the foundation for any commodity futures trading campaign.
To summarize the pattern: Look for the final panic drop, the fast short covering rally, the second bottom decline test, the next rally and then the the last anemic, labored correction into a third higher bottom. The structure is never exactly the same each time, but the general concept is what's important. This method can be applied to any time frame and any type of market, commodities or stocks.
Here's the S&P 500 weekly chart used for the B-U-C-K-S reference:
http://www.thomascapitalmanagement.com/course2/27-TheThomasBUCKSMethod-883352.htm
Good Trading!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete 44+ lesson, "Thomas Commodity Trading Course" - they're all free. http://www.thomascapitalmanagement.com/commodity/welcome.htm
Main site: http://www.ThomasCapitalManagement.com
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