Here’s more information on agricultural trading limits on the grains. I had a couple of questions about this from my last blog so I want to address these questions and build on the information to discuss a bit more deeply the rules with the limits.
First, some of our astute readers picked up on on my typo that the corn limit is indeed $.40 and not $.30. Thank you for letting me know. But mostly thank you for reading this blog!
Second, I had questions regarding “lock Limit:” moves. Lock Limit moves are when price has moved the full limit and price needs to move farther in order to find buyer and or sellers. Here is a excerpt for investopedia:
Definition of ‘Lock Limit’
Commonly associated with the futures market, a lock limit occurs when the trading price of a futures contract arrives at the exchanges predetermined limit price. At the lock limit, trades above or below the lock price are not executed.
Investopedia goes on to explain ‘Lock Limit’ with the following example:
For example, if a futures contract had a lock limit of $5, as soon as the contract traded at $5 the contract would no longer be permitted to trade above this price if the market is on an up trend, and the contract would no longer be permitted to trade below this price if the market is on a down trend.
The main reason for these limits is to prevent investors from substantial losses due to the volatility found in futures contract.
Hopefully this helps. Now, the next step is to realize that the “limits” change after a close at the limit for example if corn were to close $.40 (40 cents) up or down the next days limit would be expanded to $.60(60 cents) this is call the “Expaned Limit”. This is true for most of the Ag comodities here is a list of the comodity with their “limit” and the “expanded limit” also is included is a link to the CME (Chicago Mechantile Exchange) web page explaining the contract specifications.
Agricultural Trading Limits – aka Lock Limits
Corn: Limit $.40, Expanded Limit $.60
Soybeans: Limit $.70, Expanded Limit $1.05, next Expanded Limit $1.60
Soybean Oil: Limit 2.5 cents, Expanded Limit 3.5 cents, next Expanded Limit 5.5 cents
Soybean Meal: Limit $20, Expanded Limit $30, next Expanded Limit $45
Corn and Soybeans are by far the most liquid markets and are the place to start if one is going to trade the agriculturals. Wheat is also another liquid market that is highly tradeable.
On the CME website: http://www.cmegroup.com/trading/agricultural/ one can see the vast array of Ag market available including: Livestock, Dairy, Softs among others (note some of the Softs have very nice volume and price movements). Be very careful to examine these market before trading them some are very thinly traded and can cause some very painful trading losses if one finds they cannot exit a trade at a beneficial price point due to lack of buyers or sellers.
It is always important to understand the market one is trading. I will see if Gail and I can collaborate on a blog next week to talk about what to look for in choosing a market to trade.
I hope this helps. Feel free to contact me with any comments. Till next time happy trading.