Commodity Futures Trading
with Stops
...Protect Yourself and Lock in Those Profits!
Do you approach commodity futures trading with stops?
Making money futures trading is tough enough - don't make it harder on yourself than it needs to be.
Commodity Futures Trading with Stops can help your trading. But inconsistent use of stops and stop loss order...or worse...not using them at all...can be a surefire way to kill your futures trading efforts.
In this section, you'll about how to trade commodity futures with stops through some examples...illustrations of the benefits gained from using a stop order...and the losses you can suffer by not using a stop order.
On this page, we'll cover:
- The Stop Loss - Defined
- Examples of Employing a Stop Loss
- A Stop Loss Order Works - Most of the Time
- The Stop Order - To Use or Not to Use?
- The Stop Sell & Buy Stop Order - Variations on a Theme
Other than the two different variations we'll cover in the last section, we'll be focusing on the basic stop loss here.
The Stop Loss - Defined
In futures trading, the terms "stop", "stop order" and "stop loss order" mean the same thing and are used interchangeably.
A stop loss or stop order refers to a type of trading order, which help to both limit your trading losses, and lock in trading profits, regardless if you are long or short a particular futures commodity contract(s).
The classic definition of of a stop loss order is this:
A trading order to buy or sell (in our case) a futures contract(s), once the commodity you're trading hits and/or surpasses a predetermined price point.
What happens then?
In commodity futures trading with stops, once your predetermined price is hit, the stop order is triggered and becomes a "market order" which is immediately executed (bought or sold) at the current market price.
The end result of this occurrance is your trade position is liquidated, taking you out of the market. In commodity futures trading with stops parlance, this is also known as being 'stopped out' of the market.
Commodity Futures Trading with Stops
...How to Use Them
Let's look at three examples of how to use stops when trading in our commodity futures trading with stops overview.
Trading with stops help you to minimize your losses and/or lock in trading profits.
We'll assume you are "long the market" (in a trade, expecting a price rise), that there are no trading commissions figured in, and a 1 point move = $100 in the following examples of how to use stops when trading.
Commodity Futures Trading with Stops EXAMPLE #1
==> When the market moves against you:
You buy 'x' commodity contract when the price is at $10. You can live with a $200 maximum loss on the trade.
So you set your stop loss point / stop order at $8.
(2 point difference x $100/per point = $200 risk).
After your order is filled, the market immediately moves against you, and the price drops to $5.
Because your have your stop loss in place, you are stopped out at $8, incur your maximum loss of $200, and are out of the trade.
Setting your stop loss order at $8, (the market dropped to $5) saved you from suffering a further $300 loss ($8 - $5 = 3 points x $100/point) on the negative price move.
During your futures trading career you'll definitely experience this when commodity futures trading with stops. You never know exactly how much room to leave for the market to move.
However, the overriding consideration needs to be your risk and loss tolerance level. If you're not comfortable risking $500, $1000 or whatever it is on trade in potential loss, then don't.
But don't be too upset if the market takes off on a good sized move either. It does that.
Go for a balance when commodity futures trading with stops,and recognize you'll miss profitable moves here and there, particularly if you prefer to trade with tighter stops.
Commodity Futures Trading with Stops EXAMPLE #2
==> When the market moves in your favor:
You buy 'x' commodity contract at $10. You can live with a $200 maximum loss on the trade. So you set your stop loss point / stop order at $8.
After your order is filled, the market moves in your favor, rising to $15.
You decide to lock in some profits in case the market pulls back, raising your stop loss to $13. The price does pull back, hits and settles at $13.
You are stopped out of the market and trade, but this time, with a $300 profit. ($13 stop point minus your $10 trade entry point = +3 pt price rise x $100 pt = $300 profit)
Could you have gotten all $500 of profit?($10 entry - $15 = $5 rise x $100 = $500 profit) Sure, by moving your stop to $15 instead of $13.
In this example of commodity futures trading with stops you're in the black. Way to go!
But remember, don't get greedy. It's ALWAYS a good thing to take profits when commodity futures trading with stops.
Or, what happens sometimes when you do almost everything right?
Commodity Futures Trading with Stops EXAMPLE #3
==> Breaking even on a trade:
You buy 'x' commodity contract at $10. You can live with a $200 maximum loss on the trade. So you set your stop loss point / stop order at $8. After your order is filled, the market moves in your favor, rising to $15.
In this example of how to use stops when trading, you decide to lock in some profits in case the market pulls back, and raise your stop loss to $10 (you want to give the market some 'breathing room', hoping it will move higher but knowing it may pull back some before doing so.
The price does pull back, hits your stop at $10, but then makes a very nice rise past $15 to $18, as you expected.
But, you are stopped out of the market and trade for zero profit, breaking even. ($10 stop point minus your $10 trade entry point = 0 pt price rise x $100 pt = $0 profit)
You missed the main move up for $500 profit, and the additional move to $18 (total of $800 potential profit on the trade). OUCH! Hate it when that happens!
The market "took" more breathing room than you thought it would. But you're even. Didn't lose any money. (less ouch)
That's OK. That's part of the world in commodity futures trading with stops.
Live, and learn, to trade another day.
A Stop Loss Order Works
...Most of the Time
Keep in mind that a market order (after your stop order is hit, it turns into one) does not guarantee you will be stopped out of the market at the level you've previously set (in a price move against your position).
Although it's called a stop loss point or stop loss order...unusual market circumstances (ex: limit moves) outside of your control can negatively impact one of your trades.
In these situations when commodity futures trading with stops...the price can move through your stop loss point without triggering your stop, cutting into profits you've already locked in...or in a negative price move against your position, this condition can cause you to to exceed your desired/maximum stop loss, and suffer greater losses.
We'll talk more about this situation next.
Volatile Price Moves
...When Stops May NOT Work
Sometimes your stop loss order isn't enough to stem your desired maximum loss potential in a futures trade.
Let's look at what happens when commodities futures trading with stops in fast moving or even highly volatile commodity market conditions.
Unsettling market news or a radical change in weather, a key commodity producing countries political instability, are some examples which
...can drive the market price higher or lower beyond your preset stop order price point...resulting in getting stopped out at a less advantageous level (= costing you money).
Limit Moves
Limit moves can and do occur when trading commodity futures with stops...and when limit moves happen, your stop loss unfortunately doesn't work.
In rare cases, this can happen in very short time frames, sometimes minutes, when a commodity goes 'limit up' or 'limit down' during the trading day, or sometimes right off the opening trading bell.
In extremely volatile market conditions and/or in illiquid markets(very low trading volume and open interest), this "limit up"(rising prices) or "limit down"(falling prices) phenomenon can occur several days in a row.
Limit Move Control Maximums
The phrase "limit up" or "limit down" refers to the maximum number of cents or points a certain commodities priceis allowed to rise or fall during a daily trading session.
Once that limit is reached, trading is suspended until the following day.
These controls were put in place by the exchanges to curb market volatility and avoid market panic until the market - traders, commercial hedgers, institutions, and speculators - returns to a more settled state.
In this type of situation with a commodity and market moving way too fast for normal trade execution to keep up...and the market moving against your position...your plan for commodity futures trading with stops will likely be hit beyond, and sometimes far beyond your original stop loss point.
Your position will likely be stopped out at a far less attractive price point.
Translation?
The loss of more profit you'd locked in than you'd hoped for. Or possibly losing all the profit you'd previously locked in due a rapid moving market...and potentially more.
Limit Move's Can be VERY Costly
If you're unfortunate enough to get caught in a limit up or down situation against your trade position for multiple days in a row, this could add up to a potentially very large, even devastating loss.
And there is nothing you can do about it. You are at the mercy of the futures markets when you choose to play this game. That's why all trading sites have those ominous sounding disclaimers about the potential for losses in futures trading. There's a good reason for them!
Riding the Good Side of a Limit Move
Conversely, when commodity futures trading with stops, you can reap HUGE profits if caught on the good side of a limit up situation (you're going long in a limit up market move, or you're short in a falling, limit down market move).
You won't need your stop loss, as the market is just going up or like a rocket or down like a rock, and you're on the right side of the price move.
If you're smart, you'll learn about, and then stay out of illiquid or more volatile markets, minimizing the chance of being caught in a negative limit move against your trade position.
But there are other times when a fast moving market and price move against your position can also pass through your stop loss order, without triggering it, causing you to suffer larger losses.
Just be aware that it can happen...so, learn all you can about the futures market(s) you want to trade, study historical data, etc., so that you'll be as informed as possible and as ready as possible to minimize this occurring.
Commodity Trading with Stops
...To Use or Not to Use?
There are different schools of thought on commodity futures trading with stops.
Some traders advocate never using a stop loss order. While some prefer to use a 'mental' stop loss point.
One of the main reasons for NOT using a stop loss
...or using a 'mental stop...or a VERY loose stop order
...is the desire by some traders to avoid being prematurely stopped out of a positive price move, and maximizing futures profit gains.
Doing so lets the market go through its' normal daily, weekly and monthly gyrations.
This is great when the market moves in your favor.
But if you have no safety net (stop loss) in place, and the market moves strongly against your trade position, the cost to you can be VERY heavy.
We're talking thousands of dollars lost, not a few hundred.
Should you trade without a firm stop loss order?
There are only a few types of traders who should trade with mental stops, very wide stops or no stops at all.
These are traders willing and able (mentally, discipline-wise, risk tolerance wise and financially) to wait out periodic downturns...(EX: in a long position)...for the market to finally make its' move up.
By sustaining potentially large "paper losses" on an open trade, these traders are still in the market when it does move higher, when they can capture maximum trade profits on those bigger price moves.
Most traders don't fall into these categories. Good advice is to consider NOT being a cowboy and playing with fire trading without a stop loss order.
Other traders subscribe to what I call the "American Express" version - never leave home (trade) without using a stop loss order when futures trading.
Most futures traders, especially brand new and younger traders, are much better suited by commodity futures trading with stops.
A Stop Loss Helps You Manage Trading Emotions
Many traders have difficulty managing the emotional aspects of trading (fear and greed, pulling the trigger, etc.), much less trading successfully.
Knowing you'll minimize your downside loss potential if the market moves against you, commodity futures trading with stops can be comforting.
Not to mention the benefit of trading account balance retention, by not exposing your trading capital to potentially much larger losses, vs. trading without a stop loss in place.
For more info on Managing Trading Emotions and leaving the Trading with Stops page, click here
Commodity Trading with Stops
...Using a Tight Stop Loss
Commodity futures trading with stops, and/or if you choose to trade with a fairly tight stop loss order, does have a potential downside though.
You will occasionally miss out on some good moves and trading profits.
Maybe more than you care for.
Can't be helped.
The market will head up, drop back down, hit your stop and take you out of the trade. Then it'll head north (if long) for a good profitable run. It happens. Time and again.
Frustrating? You bet. But it's just the nature of the commodity markets' ups and downs.
One good trading rule to follow is never chase a trade. Another solid maxim to follow is don't get greedy.
There will always be another good trade coming along, potentially several a day, depending on the futures market(s) you are trading, your trading style and your strategy of commodity futures trading with stops.
Th bottom line is you have to clearly understand your own trading personality and style...your tolerance of risk and potential loss...and your ability to hold fast to your trading plan...in deciding how to employ stops and the stop loss order in your futures trading.
For more info on Trading Tips and to leave the Futures Trading With Stops page, click here
How to Use Stops When Trading
...Stop Order Variations
Two variations you'll come across when commodity futures trading with stops theme are the 'sell stop order' and 'buy stop order'.
The sell stop order is used when going long and expecting the price to rise.
It is always placed under or below the current commodity market price.
Once the price hits or drops below the sell stop order, a market order is triggered to sell at the best available market price...and it may or may not be at your predetermined stop price, if the market is moving fast.
The buy stop order is just the reverse, and is used when you are shorting or 'going short' the market (anticipating falling prices).
This order is always placed above the current market price, and is triggered when the price hits or exceeds the market price.
In either case of the sell stop or buy stop , the objective is same - to minimize loss or to lock in some profits, depending whether you are long or short the market.
Hopefully this 'primer' on how to trade with stops helped you understand the benefit of using a stop loss order in your futures trading, and wasn't too confusing with the various examples.
To go back to the Home Page from the Commodity Futures Trading with Stops page, click here
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