Let Your Profits Run in Commodity Trading

10/29/2009 12:01 am EST

Focus: COMMODITIES

Andrew Abraham

Contributor, SeekingAlpha.com

Letting your profits run in commodity trading is one of the most basic attributes of trend following. Commodity traders who adhere to this tenet put themselves in a position of potential long-term success. The problem is that many new or inexperienced commodity traders do not have either the patience or discipline to let profits run. They are afraid that the trend might turn around or that they will give up profits. This is one of the major reasons commodity traders fail. When one uses a mechanical trading system (if they can follow the signals), it forces the commodity trader to follow the trend…and to let profits run.

The basis of a well-thought-out plan or mechanical trading system is that the trading system forces you to trade with the trend.

When you enter a futures trade, there are always four possible outcomes.

1. A small profit
2. A large profit (rarely)
3. A large loss
4. A small loss

Using a protective stop, a mechanical trading system reduces the possibility of a large loss. The use of trailing stops may help lock in a small gain or a small loss and might allow you to participate in a large gain. The key is trying to minimize the likelihood of a large loss.

To participate in a large gain is obviously the goal of every successful trader.

Large gains in commodity trading are necessary in order to achieve the desired return for your portfolio. Most commodity traders, however, find it extremely difficult to remain in their position for a large enough move in either direction. This is because our minds are not wired to be successful traders. Why is this?

This happens because, emotionally, we want the instant gratification of taking small gains. Again, this is the one of the surest ways to fail as a commodity trader.

Even though market history tells us that many trends have gone farther than anyone expected or even imagined, many successful traders today still tend to second guess what they know to be true, for fear of losing any gain. Depending on ones’ time frame, fortunes could have been garnished in the grains, silver, or how about last year’s crude trades, both on the long side and the short side?

Taking small gains eliminates the opportunity of participating in the extended advance or decline, which is what results in a large gain.

A good trend-following system forces you to stay with the trend.

It does not anticipate market direction; it instead follows market direction. Mechanical trading systems provide your exit point. Knowing when to exit based on the system’s historical data enables you to follow trends to their fruition.

In the uncertain world of futures trading, nothing makes more sense than to follow the trend and let your profits run. That is if that is your goal. Some people just want excitement. You decide. If you truly are seeking long-term success in the commodity markets, let your profits run.

If you have commodity-related questions, please, feel free to contact me. I will be happy to answer your questions to the best of my ability.

By Andrew Abraham

Andrew Abraham is a trader and blogger at MyInvestorPlace.com

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