Taking profits in commodities is one of the more important aspects of the business of trading. New commodity traders are often conflicted with the emotions of fear and greed when it comes to taking profits. Fear will often cause traders to take profits too early and greed often causes traders to stay in a trade too long and give back a good portion of the profits. A successful commodity trader will ignore both of these emotions and use a more structured means of taking profits.
Know Your Objective Before You Place Trades
Commodity traders should know where they plan on taking profits on a trade and how much they plan on risking on a trade before the trade is even placed. This doesn’t always mean a trader knows the exact prices on the risk and profit levels. A trader could have a set of rules where he or she plans to exit a trade. If certain conditions are met, the trader will take profits on a trade.
Conditional Exits: Trend following traders will often let profits run until the market reverses. For example, a commodity trader could buy gold futures and hold on until the market breaks down below the 20-period moving average. Once the market moves below the 20-period moving, the trader must exit the position whether it is a win, loss or draw.
Fixed Profit Exits: Some traders like to use a fixed dollar amount to take profits on all their trades. I often use this method when I daytrade futures contracts. It is a very simple way to trade without trying to think too much about exit levels. Sometimes I will adjust these levels if volatility significantly increases or decreases.
Exit at Technical Levels: Taking profits at a major support or resistance level is one of the most logical types of exit to use. Support and resistance points eventually break, but the odds are that they will hold. Therefore, many commodity traders will take their profits before the market tests these levels.
The most important thing to realize about taking profits is that it is best to have a plan before the trades are placed. A lack of a profit objective will leave a trader with uncertainty and stress. This will often lead to poor decision making and constant second guessing.
