1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

Knowing When To Take Profits in Commodities

By

Many commodity traders often fall into the trap of not knowing when to take profits on their commodity trades. Sometimes they take profits too quickly and other times they hold out for a big move and their quick profit turns into a loss. Knowing when to get out of a trade can often be very difficult, but there are some easy steps to take that will help alleviate this problem.

The first thing that all traders must consider is that you will never catch the top and bottom of every market on every trade. In fact, you won’t even get close. There is no such thing as perfection in trading. The perfection that a trader needs to consider is implementing the rules of a trading system to perfection and maintaining discipline.

A trader must think of trading more as a game of numbers and not necessarily trying to impose logic on the markets. The markets will do whatever they are going to do and nobody can pinpoint 100 percent of the time what they will do. Sometimes a technical or fundamental setup in a market will indicate that the market will make a large move. Sometimes it will and sometimes it won’t. Because of this, a trader has to be consistent on when to take profits.

For example, say that you typically buy a commodity at trendline support on the daily charts. You might risk $250 per contract on each trade and you shoot for $500 profit. After trading for a period of time, you realize the markets will sometimes move far beyond your $500 profit objective and you leave a lot of money on the table. Other times, the market moves up $300 and reverses. You eventually get stopped out at breakeven or you continue to hold and eventually take a loss on the trade.

After a while, it is easy for a trader to get confused and frustrated. After a couple trades in a row where the market moves well past the $500 profit objective, the trader decides she will hold out for a $1000 profit on the next trade. The markets will often mess with your head when you decide to do this. Sure enough, the market makes a $500 move in your direction and then reverses. You end up getting out at breakeven, as you didn’t want to move your stop up too tight.

This will happen over and over. The more times you change your profit objectives, the worse things will become. It is best to stick with the same profit strategy. If you have a high comfort that you can be successful taking $500 profits and $250 losses, then stick to it. Don’t worry about a market making a $2000 move and missing out on profits. That will only drive you nuts. There will always be another trade coming in the future. If you have a profit and loss strategy that works, don’t mess with it.

There is one tweak that I recommend traders to do. You can measure the average daily range over a period of 10 or 20 days and adjust you profit objective accordingly. In time of higher volatility, you might want to have an objective of $700. In periods of low volatility, you might want to lower the objective to $350. I wouldn’t make changes too often, but this gives you some ideas for tweaking your formula.

It is important for a trader to stay “In the Zone” so to speak. This means focus on taking your little slice of profits out of the market. Don’t get greedy or egotistical and think you have to catch every last penny of every move. That type of thinking is what causes traders to get confused and second-guess their trading. It clutters their minds and eventually causes them to lose money.

©2014 About.com. All rights reserved.