Box-o-Rox

Measuring by thumb-width is not a precise approach, but is often a very good starting point for setting materials in place, with more accurate adjustments to follow. A moving average on a data chart, e.g. wheat futures, is akin to a assessment by thumb-width, crude and likely to benefit from more incremental adjustments, but it is fast and intuitive, allowing perspective and a quick judgement of general position for timely estimates. The moving price average is a very basic measurement of trend.

Anyone who has attempted to make sense of linear price charts has likely encountered the moving average, a line generated each day by averaging a given fixed number of prices over time. For example, a 60-day moving average is an average of the last 60 days prices, calculated at the end of each day going forward, adding a new price point on the front end and dropping one from the back end of the moving 60-day period. This creates a wavy line that responds over time to the general rise and fall of prices with a smoothing effect that has a positive slope when the price is trending upward, and a negative slope when the price is trending downward. Any number of days averaged may be chosen in an attempt to match the common movement of whatever is being charted. The idea is to overcome the daily “noise” of back and forth whipsaw price movement, but still retain the character of the trend.

A moving average is simple to construct and maintain, and intuitive in its movement and meaning, hence the “thumb-width” measurement analogy. It has value as an indicator, but it is limited in its application. Many an enthusiastic novice trader has attempted to apply simple moving averages as a trading signal generator, but has found the instrument to be too blunt for precision order entry. In reality, it is better to get a scalpel instead of a machete for surgery, but a machete has its application in the jungle where the scalpel is a waste of time.

The ”BoR” (Box of Rocks) is a dumb indicator, crude and definitely improvable to suit your own application, but is a decent starting point for gauging a general trend.

We use the 60-day in wheat because the period matches many seasonal patterns, is reasonably sensitive to significant price movements, is intuitive and easy to maintain. It’s a thumb-width measure. It is NOT a trading device.

There are studies demonstrating that over time, wheat producers’ annual average sale price is in the lower 33% of the year’s price range. This is confounding, because according to what we hear at coffee, we know that most of you always sell at the top 10% of prices every year. We also know that you have kept Grampa’s secret wheat sales method secret and we would never dare even ask for how that is done. The Box-o-Rox is for the rest of us that have not yet discovered the “Golden Price Discovery system”.  I also know that I hate that S.O.L feeling (Sold On Low…not the other meaning, although they are roughly the same). The Box-o-Rox is a part of the answer.

The BoR is this:  Divide your wheat that must be priced into 12 equal “incremental” amounts. The intention is to market one increment each month on a given date. If we hold back incremental sales when the current market is above the 60-day line, catch up when the current price drops below that line, and stay on schedule with sales when current prices are below the line, the average price received is likely to be at least close to the annual average over 12 months, and occasionally much better.  Not very exciting, and there is no guarantee, but pretty reliable.

There is always temptation to speculate, and sometimes that is even appropriate, but at least you will not be making any very large marketing errors. It’s that one, big speculative error that can kill an otherwise good year. Over time, a bias toward being patient with uptrends and more aggressive with downtrends is a useful and profitable habit.