This post originally appeared on Scott Hoffman’s blog, FuturesInsightBlog.com, where Scott writes daily about the commodity futures markets.
In marketing my services I offer the user’s Guide to Swing Trader’s Insight (STI). (Get a copy of the Guide to Swing Trader’s Insight). I call the STI user’s guide a “Guide to Swing Trading Futures”. With that title, I end up getting a number of people requesting it who think they will get a “Futures Trading 101” type piece. I realized that I don’t yet have something suitable for people needing a Trading 101 type guide.
For this reason, I am currently in the middle of writing my Futures Trading 101 guide. In one section of this guide, I wrote up the process of entering a trade and then how to manage the trade once it is on. In doing so I wrote up my thoughts on how to manage then exit a trade. This is the hard part of futures trading–in my opinion–so I thought I would post this portion of the upcoming guide, especially after I discussed the trade exit issue this morning with a prospective trader.
There are two general methods futures traders use to liquidate a trade. First, a trader can pick a profit target for a trade; a point at which he believes the market will stop moving in his favor. If he feels there is such a price he may look to liquidate his trade at this price or shortly before it in case it doesn’t quite reach.
The other school of thought is that instead of picking a point to pick where to liquidate a trade, the trader adjusts his stop loss to reduce his risk then to lock in profit as the trade moves in his favor. This allows the trader to continue to profit if it keeps moving in his favor.
Which of these should you use? Realize that exiting a trade is often the most difficult decision to make when trading. If you pick a profit target and exit when the market gets to it you forego additional profit if the market keeps moving in your favor. If you choose to trail your stop loss and not use profit targets you will always end up giving back some profit as the market retraces to your stop loss. Realize there’s no one right answer to this question. Make sure you are consistent and conscientious in your approach, and keep records of your trades. Over time you’ll figure out which approach works best for you, or maybe you will end up using different approaches in different situations
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
© 2010 Scott Hoffman
