Friday, February 25, 2011

Where to Place Your Stops on Commodity Trades (Hint: BELOW Obvious Support)

Here's a classic example of why it's advisable to keep your stops just below obvious levels - and out of the market, too.

Our rice trade thus far has not panned out as hoped (we bought the two-year breakout in rice prices on February 1st - here's why).

After an initial continued run higher, rice broke down in a big way.  Though I had mentioned moving my stops up to higher support levels, the market dropped faster than I acted - and I kept 13.50 in mind as a level of strong support (and a logical place for a stop).

Experienced traders say you should never enter your stop in the market - but instead keep it in your head, or on a spreadsheet, or in a software program not connected to your brokerage account.  Well, here's a great example of why they say that:

Rough rice support at 13.50
Source: (Click to enlarge)

How many weak hands were driven out of this trade when the powers that be sent rice "limit down" 3 days in a row - just below 13.50, where most longs surely had their stops placed?

I don't know how this trade will pan out from here - perhaps it will remain a loser - but I found this to be a classic case study on why: 1) you don't put your stops in the market, and 2) why you need to set your stops below the obvious levels that everyone else is using.

Now perhaps I should consider taking the Jim Rogers approach to buy on the dips rather than the breakouts - especially at or near key support levels.  We'll keep an eye on this entry strategy, especially with respect to the grains and softs.

Though "back in the day" (cerca 2005-08), buying the breakouts was a profitable entry strategy for me in these markets.

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valeriobrl said...

Great post man.

Brett Owens said...

Thanks man appreciate it!

Forrest Merrill said...

It sucks that the guys with the big hands can do that. Live and learn.

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