An old saying among traders is, “plan your trades, and trade your plan.”

You have your marketing plan. Do you have the discipline needed to trade (i.e. execute) your plan?

Marketing plans, with their written price objectives and decision dates, can feel rigid and constraining. Stuff happens - coronavirus, droughts, etc. - and we need flexibility to adapt to unexpected events. Technical tools and, in particular, trend-following tools, can give you that flexibility.

Trend-following tools are just one aspect of technical price analysis. You see references to this type of analysis every day - moving averages, trend lines, support and resistance, oscillators, etc. A purely technical approach to price analysis generally ignores fundamentals, based on the argument that all known information is in the market and current prices. If you want to know futures price direction, study past price action.

There are several things to like about using technical analysis and, in particular, trend-following tools like a moving average. First, the information is relatively easy to find. Maybe you like the chart commentaries from a particular analyst (“the current uptrend will be violated by a close below...”), or you subscribe to a market advisory service, or you found a website (barchart.com is an excellent website for technical analysis). You can even create your own technical tool and track it on your smartphone or computer.

Another thing I like about the technical approach is that it gives me an objective answer - that’s “objective,” as in unemotional. The technical approach does not care that you need another 30 cents/bu. to break even. A sell signal happens when it happens, and to maintain discipline in executing a plan, you should respond accordingly.

Finally, the technical approach is quite effective in strong trending markets. If a trend is real and persistent, a trend-following tool like a moving average will keep you on the sidelines while prices continue to rise. When the sell signal finally arrives, you may have squeezed 50 cents or more out of the market, over and above your original price target.

What’s the rub?

There is a rub to using a technical approach. How do you know if this is a strong trend and not just a short-term bulge in the market? The only honest answer is that you don’t know – only hindsight can identify a strong trend.

Where does a trend-following tool fall short? Sideways markets are a problem – markets stuck in a narrow trading range. Trading-range markets tend to give you buy signals at the top end of a range, followed by sell signals on the lower end.

An even larger concern is that trend-following tools are susceptible to sharp price declines. Let’s pretend I’m riding the trend when bad news breaks – real bad news. The corn market declines 25 cents today – limit down! Tomorrow the market declines another 25 cents and 10 cents more the following day. Our trend-following tool is now sending a clear sell signal, but it won’t do you much good.

Let me suggest a situation when a trend-following tool could be most effective. Consider a year when pricing opportunities are below my minimum price objective, and they remain there until mid-June. To-date, I have made no pre-harvest sales. The weather turns dry and a growing season rally begins. A clear trend higher is in place. Do you play catch-up with one large sale? Sounds risky. Maybe now is a good time to use a trend-following tool.

Trend-following tools offer a disciplined way to change your marketing plan.

Some guiding thoughts on the use of technical analysis and trend-following tools

Edward Usset is a Grain Market Economist at the University of Minnesota, and author of the book “Grain Marketing is Simple (it’s just not easy).” You can reach him at [email protected]

Read the other articles in the Advanced Marketing Class series: