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As traders, we can sometimes spend so much time looking for the latest technical analysis indicator that we forget to have a good look at the past history of the market we are trading. WD Gann wrote that the future is but a repetition of the past, but is it really that easy? Let’s take a look at Lumber futures.
Chart 1 below is a weekly bar chart of Random Length Lumber Futures (LB-Spot1 in Profitsource). When we are looking to start trading any new futures contract, it is important that we understand the contract specifications of the market we are trading. These are easily accessible from the website of the Exchange on which the contracts are traded, in this case the Chicago Mercantile Exchange (www.cme.com). The minimum fluctuation is 0.10, which is equal to $US11 per contract traded. The margin required is $US1650 per contract. The six contract months traded each year are January, March, May, July, September and November.
Chart 1
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We can see that Lumber has been in a strong downtrend for the past three years, and that over this time it has halved in value – not a bad move for futures traders looking to take advantage of a strongly trending market. Over the past year, the market has found support several times around the 225 to 230 price level.
Now we look for a repeatable pattern occurring in the market. Chart 2 below shows that over the past 10 years, the month of October has produced a high frequency of strong lows in the lumber market, each of which has been followed by at least a 20% move in price to the upside. At $US11 per 0.10 price movement, a 20% move up from the low is equal to approximately $US5500 profit per contract.
Chart 2
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Looking at this past history, we can see that October is historically a better time to be looking for lows rather than highs in the lumber market. Let’s zoom in and take a look at the current market action on a daily bar chart. Chart 3 below shows the past five months of trading.
Chart 3
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We can see that the market made a recent downside range from August to September. When applying this range to the October 1 high, we can see that at the time of writing, the market has made a potential double bottom at the 50% milestone – an important price level all Safety in the Market students should be familiar with. I would also encourage those students who have studied David Bowden’s Ultimate Gann Course to apply some basic time analysis to the bigger picture moves in this market.
Will history repeat, giving us another October low, and a strong move up? Time will tell. The important thing is to stick to your trading plan, and wait for an entry signal – never go rushing into the market just because you think you have a good setup.
Hopefully this article has convinced a few of you to take a closer look at the markets you are trading. As far as Gann analysis goes, though, this is just the tip of the iceberg.
Be Prepared!
Mathew Barnes
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