Commodity Prices – Protecting Your Investment
So much of what is written about commodity trading has to do with investment strategy; what you should buy, how much you should pay, or which tropical island you should buy with all of your profits. While the positive side of investing cannot be emphasized enough, an important part of your trading plan is knowing what to do when things don’t go so well. Commodity prices and how they can change require you find ways to protect your investments.
Two of the best ways to protect your investments against commodity price changes are limit orders and stop loss orders. These are both protective orders that help you keep your money, not give it away to changes in commodity prices.
Limit Order
A limit order is a futures trading order that instructs your broker that when an underlying asset reaches a certain price or better, he or she should execute the order and purchase the desired asset at the best commodity price available. If the price of a commodity does not drop to the requested level, your order is not filled.
For example, if the price of corn futures is at $5.00 dollars per bushel and you place a limit order at $4.50, your order will not fill unless the price drops to $4.50. If the commodity price falls from $4.75 to $4.40, your order will be filled at $4.40. Conversely, if the commodity price only falls to $4.55, your broker will not fill the order. This type of market order helps protect your money by getting you the commodity price you want and not filling if your price isn’t reached.
Stop Loss Order
A stop loss order is a commodities trading order that instructs your broker that if an asset you are holding drops to a certain level, he or she should sell it. Once the price has been reached, the commodity broker will implement the trade, regardless of the current commodity price. If the price never falls to the agreed amount, the order will not be executed.
As an example, if you enter a stop loss order to leave a crude oil position you are holding when the price drops to $55 a barrel, your oil futures have these possible scenarios:
- If the price of oil drops to $55, your commodity broker will enter a market order to sell your position, getting the best available price.
- If the price of oil drops to $55 but then quickly drops to $54, that may be the price you get. Remember, once the price touches $55, your broker will place a market order but that space of time can allow the price to temporarily drop more.
- If the price of oil drops to $55 but then quickly rebounds to $56, the trade will be initiated ever though the amount is back above your target for the commodity price. It is likely you will get the $56 but your futures option will still get executed.
How These Orders Help Protect You
Commodity prices in the futures markets have the potential to move quickly. If you are holding a futures contract, it is easy for things to get volatile and your position can become compromised without your even knowing. By using limit orders, you can enter a position at the commodity price you choose, not pay more because you can’t monitor its movement; your broker can do the work of watching the commodity price for you.
Stop loss orders don’t protect you before you make a trade; they protect you AFTER you enter a position. If you are not sitting by the computer watching commodity prices, a negative move could occur before you can move to stop it. By having a stop loss order, you can watch your positions without being in front of your computer.
Conclusion
Stop loss orders and limit orders can help the investor to form part of a strong stop loss strategy. While there is plenty written about profits when commodity prices rise, it’s good to know you have a plan in place in case commodity prices fall.
Market Direction: Candlestick signals can pinpoint the timing of a trade. Investor sentiment creates reoccurring situations that can be clearly identified. The evaluation of candlestick signals puts an investor in a position to anticipate when a price trend may become completely altered. Trend conditions can be easily observed. The advantage of understanding the investor sentiment that forms each signal is the identification of a change occurring.
The MTRX chart illustrates what investor sentiment was doing. A sideways trading channel was the predominant feature. Some simple trading observations can be applied. After a strong price move, and a sideways trading action occurs, what is the obvious criteria for anticipating the next price move? Moving averages! A strong move away from the 50 day moving average made that moving average a potential target. As the 50 day moving average and the sideways price movement converged, what should be anticipated? Witnessing some important candlestick signals! As seen in this chart, a series of doji's occurred when the price met the 50 day moving average.
MRTX
Observing a gap up after a Doji at that level reveals very important investment information. Investor sentiment was becoming very bullish once again. A gap up after a Doji is a very strong bullish signal. It illustrates that after a phase of indecision, the Bulls have demonstrated which direction the trend will move with great authority. The continuation of the buying on Monday indicated that the recent resistance levels were now not acting as resistance. The strong uptrend starting in the beginning of March can be considered wave one. The sideways trading action, until the price and the 50 day moving average intersected, would be considered wave two. The gap up from a Doji off that moving average and a breakout through the top of the trading channel should now be considered the beginning of wave three.
Candlestick signals merely demonstrate what investor sentiment is doing at critical times. This information permits a candlestick investor to enter trades in an extremely timely fashion. It also allows for the evaluation of the proper stop loss levels. The expectation of a strong wave three is based upon centuries of trend analysis utilizing candlestick signals. They work as effectively today as they did centuries ago. The elements of investor sentiment, incorporated into investment emotions, has not changed. The emotions of investors provide reoccurring patterns. The candlestick signals create the opportunity to identify those patterns in their early stages. Take advantage of the information provided in candlestick analysis. The common sense elements applied to candlestick analysis dramatically reduces the emotional input. Once confidence is gained by what the signals are conveying, the most inexperienced investor will grasp when buyers are stepping in or coming out of a price trend. This is the same analysis utilized by the experienced traders.
The Jay-hook pattern continues to make itself evident in the Dow chart. Although Monday showed small consolidation, the stochastics continue to illustrate more upside potential. A breakout of the recent high in the Dow should continue the strong previous uptrend.
DOW
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Good investing,
The Candlestick Forum Team
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