Having a strategy for when and how to take profits on futures trades 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. 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 to risk on a trade before the trade is 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.
The following are some common exit techniques:
Conditional Exits: This usually based on some type of technical signal. Trend following traders will often let profits run until the market reverses. For example, a futures trader could buy gold futures and hold on until the 20-period moving average crosses below the 80-period moving average. Once that condition occurs, 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 trades. It is a very simple way to trade without trying to think too much about exit levels. These amounts can be adjusted if the levels of volatility significantly increase or decrease. A trader can also choose three separate amounts for exits. The first could be $100 per contract, then $200 and lastly $400. Stops can be moved closer to reduce risk as each level is hit.
THE PLACEMENT OF CONTINGENT ORDERS SUCH AS A “STOP–LOSS” OR “STOP–LIMIT” ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS.
Exit at Technical Levels: Taking profits at a major support or resistance level is one of the most logical types of exits to use. Support and resistance points eventually break, but the odds often favor that they will hold at least temporarily. Therefore, many commodity traders will take their profits before the market tests these levels.
Regardless of which exit, the most important thing is to realize about taking profits is that it is best to have a trading 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.
The plan should include the logic that profit objectives will be greater than the risk (losses) on each trade. This sounds elementary, but many struggling trades just don’t seem to implement this basic concept. A simple example might include researching and back testing a strategy that shows 50% of the trades are profitable. The parameters include risking $100 per contract and having a profit objective of $200 per contract. In theory, this strategy should prove effective and a trader should stick with those risk and profit amounts on each trade.
