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Commodity Trading Lesson Index

Lesson 46: Mrs. B raises her stop and enters a profit/exit order

When we last left Mrs. B she had entered a stop/loss order for her open long position in May wheat futures and was concentrating on where her profit/exit order should be.  It is now the New Year - 2002 - and Mrs. B remains long May wheat futures.  She went long May wheat on October 17th, 2001.  She has held this position for approximately two and one-half months.  During these 75 or so days, Mrs. B has been doing two things (a) she has remained with her long position, not being stopped out, and (b) she has exercised patience.  One of the greatest truisms in futures or options trading is "let your profits run" and "cut your losses short".  Mrs. B doesn't really try to "let her profits" run and "cut her losses short", she has simply adopted a trading program that, in and of itself, allows such a philosophy to be operational.  If Mrs. B's stop is not hit, she stays with her position.  This automatically allows her to stay with her long or short trade and, if there are eventually any profits, to possibly "let those profits to run".  On the other hand, if Mrs. B's stop is hit, and she is taken out of the market, this may have the effect of "cutting her losses short".  Mrs. B is actively doing nothing except putting into practice a trading method in which her winning trades have the possibility of a longer life span than the life span of her losing trades. 

With regard to her stop/loss order, think back to where we last left Mrs. B,

Mrs. B's initial stop/loss order is entered; it is at 279 ½.  Just as soon as she feels comfortable in moving it to a higher level, she plans to do so, trying to reduce her risk to less than $500.00 on this May wheat trade.  As mentioned, she may move it in less than a week.  She may move it in 24-hours.  Mrs. B will watch May wheat to see where it closes each day and raise her stop/loss as quickly as she feels comfortable in doing so.  Mrs. B hopes that she too doesn't live "under the roof of the falling tiles".  With a recently suffered $500.00 loss, she doesn't want a second tile to drop with another $500.00 hit attached to it.  Thus, Mrs. B will do everything she can to reduce her risk from $500.00 to a lesser amount as quickly as the markets allow her to do so. 

Mrs. B believes now is the time to raise her stop/loss order.  On January 3, 2002, Chicago May Wheat Futures closed at 296 ½.  After the wheat market had closed for the day, Mrs. B called her commodity broker with the following orders.

"Sell l contract of Chicago May Wheat at $2.87 ½ /Stop - Open Order Good Until Changed or Cancelled"

"Cancel my previous order to "Sell l contract of Chicago May Wheat at $2.79 ½ /Stop"

These two orders, entered at the same time, are known as "cancel and replace" orders - canceling the stop at 2.79 ½ and replacing it with a new stop at 287 ½.  If Mrs. B did not cancel her open stop/loss order at 279 ½, she would have two open stops for one long position.  So Mrs. B cancels her stop at 279 ½ and replaces it with a new stop at 287 ½.  Why did she pick the price of 287 ½ for her new stop?  Most likely, Mrs. B did so for two reasons.  First, she wanted to reduce her risk on this trade and, by raising her stop/loss by 8 cents, if the market does not 'gap' open or open 'limit down', she should have done that.  Second, the lowest trading price of May wheat futures on the day Mrs. B raised her stop/loss order, January 3, 2002, was 288.  She put her new stop/loss order one-half cent below that lowest price.  Having accomplished this, Mrs. B then proceeded to give her commodity broker a profit/exit order for this trade.  The profit/exit order she gave her broker was as follows:

"Sell l contract of Chicago May Wheat at $3.47 or higher. This is an Open Order Good Until Changed or Cancelled"

Mrs. B has now two open orders working for her in the wheat market.  A stop/loss entered below her position and a profit/exit order entered above her position. Mrs. B instructs her broker that these should be considered as "OCO" orders - whichever one fills first, the stop/loss order or the profit/exit order, the other will no longer be needed and should be cancelled - "OCO - One (if filled) means to Cancel the Other."  OCO orders can be officially entered on some exchanges, or will be officially accepted by some brokers.  There is, however, no hard and fast rule as to whether a broker or an exchange will accept the responsibility of such OCO orders.  If Mrs. B's broker would not officially accept an OCO order, she would simply have to watch the markets herself and cancel the unnecessary order without her broker's help.  In Mrs. B's case, she has a broker who will watch her position for her and make sure that if her stop/loss is filled first, her profit/exit order will be cancelled and vice versa.

Mrs. B has now, theoretically, reduced her risk of loss for this trade in Chicago May Wheat Futures.  She cannot say for a certainty that she has absolutely reduced her risk of loss in May Wheat because a gap opening or a limit down opening may mean that her stop/loss order might be filled below its resting level of 287 ½.  However, theoretically, she has reduced her risk by about 8 cents or $400.00.  Mrs. B has also entered, for the first time ever, a profit/exit order for her trade.  With the raising of her stop/loss order and the entry of a profit/exit order, Mrs. B plans to sleep well on the night of January 3rd, 2002.  She hopes that she will sleep even better for the month of January is over.

            Bruce Gould

To order a copy of Bruce Gould's "Choppy Market Method" to understand "Mrs. B's" reason for picking May Wheat Futures at this time, at this price,  click here.

Proceed to lesson 47 by clicking here.


Always remember that stock, options, and futures trading may involve substantial risks and that past performance is no guarantee of future performance.