Is there a way to profit from commodities without having a stop loss? The usual experience is when one fixes a stop loss, it gets hit and the market reverses. Thus one regrets fixing stop loss.
Ramani, Hyderabad
Fixing the stop loss limit for a commodity is a tricky business.To avoid the stop loss getting hit often, it is important to fix the stop loss level correctly. This is best done in non-market hours, when you are not distracted by moving prices.
Study the movement of the commodity over the past three months to determine the historic volatility.
An easy way to do this is to take the average price range over a three-month period. This will tell you how much a commodity is expected to move in a session and help you fix the stop loss accordingly.
The other factor that will determine the stop loss limit is your risk tolerance. The loss, if booked, should not result in reducing your trading capital by more than 5 per cent.
Another useful tool you can consider is trailing stop loss. While a stop loss limit is fixed at one level, a trailing stop loss can be a moving limit that helps protect your profit. For example, if you have purchased a contract for ₹2,000, you might keep a stop loss 2 per cent below, at ₹1,960. If the price moves below this level, the contract will be sold at the prevailing market price.
In trailing stop loss, the limit can be kept 2 per cent below the intra-day high. If the contract’s high was ₹2,010 (at the time of purchase), the trailing stop will initially be at ₹1,970. If the price moves higher to ₹2,030, the trailing stop will move to ₹1,990, thus protecting your profit.
More seasoned traders can consider mental stop loss, where they do not really enter the limit in the trading terminal.
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