Futures Order Entry Methods

Sometimes it is the small details that make a big difference in futures trading performance. Familiarity with commodity order types and how to properly place each of them, is critical to being a successful trader. Commodity market prices and dynamics are ever-changing, making every second count. Regardless of whether you are trading online via a futures trading platform, or through a commodity broker, knowing the type of order you need to place and placing it accurately is vital.

Communication is the key. If you have questions about the different types of futures orders and how to place them verbally or online, call your broker for assistance. Futures contracts are highly leveraged trading instruments; accordingly, mistakes in order execution are costly! Throughout my lengthy career, I’ve managed to rack up a handful of gut wrenching trade placement errors; some of them well into the thousands of dollars. It is imperative that traders take the steps necessary to keep such errors to a minimum.

Futures Market Bid/Ask Spread

Before discussing order types in the futures market, it is imperative to understand the nature of commodity prices. For any given futures contract, there are essentially two commodity quotes. There is a price at which it is possible to immediately buy the futures contract, and there is a price in which a commodity trader could immediately sell. The price at which traders can buy the futures contract is known as the ask; the price traders can sell a futures contract is known as the bid. The difference between these prices is referred to as the bid/ask spread.
In most futures markets, the bid/ask spread is minimal, but those commodity markets that lack ample trading volume can involve rather wide spreads between the bid and ask. In such markets, order slippage and transaction costs will be much higher than that of a sufficiently liquid futures market. Further, even in some liquid commodity markets, there are certain futures contract expiration months that have less volume than others. For instance, if you are interested in trading the e-mini S&P 500 the front month contract is highly liquid but attempting to trade contracts with expirations several months into the future will likely be inefficient due to a lack of market liquidity. For example, the bid/ask spread of the front month e-mini S&P futures contract is generally 1 tick, or .25 points (equivalent to $12.50) but the bid/ask spread on a contract expiring a year down the road is generally 10 to 12 points, or $500 to $600). In other words, along with the stated commission charged by your commodity broker to enter the trade, the cost of executing in the distant expiring futures contract is several hundred dollars as opposed to $12.50 for the front month.

Those new to trading in commodities, often overlook the hidden cost of the bid/ask spread built into the commodity markets, and all other markets for that matter. Some attempt to buy or sell futures contracts with distant expirations to avoid the commission cost associated with rolling positions over (exiting an expiring futures contract to enter the next contract month to avoid delivery of the underlying commodity); ironically, their quest to save a few dollars in commission can easily cost them hundreds of dollars in unsightly transaction costs such as the bid/ask spread.
You might hear some aged (or perhaps, seasoned is a better word) traders refer to the ask price of a futures contract as the “offer”. Thus, if you hear someone say “bid/offer” you can assume it is synonymous with bid/ask. In addition, if you hear a trader say “the market is offered at” it is equivalent to saying “it is possible to buy the commodity at”.

Market Order

This is the most common futures order type simply because it is the most convenient. A market order initiates the futures trade at the current market value by filling the order at the best possible price at that particular time. This means that you will be taking the bid price if you are selling the commodity contract, and taking the ask price if you are buying it. Keep in mind that a market order guarantees that your order will be filled but it doesn't guarantee that you will be happy with the price.

Limit Order

This futures order type initiates the trade at a specific price "or better" if possible. “Or better” is the key here. If the order is to buy a futures contract, “better” is equivalent to a lower price; if the order is to sell a futures contract, “better” is equivalent to a higher price. For example, entering an order to buy 1 August Soybean futures contract at $11.05 means the trader will only accept being long from $11.05 or less. In essence, traders use market orders if they prefer to get filled over receiving a certain price; if the priority is to receive a particular price, or better, a limit order should be used.

Seasoned traders know the market might hit the limit order price without the trade necessarily being executed. This is because of the bid/ask spread, and the fact that limit orders are filled on a first come, first serve basis. If there are 100 traders working a futures limit order at the same price, the earliest orders to be filled are those that put their order in first. Further, if the market peaks or troughs at the limit price not all 100 orders typically get filled because there might not be enough traders willing to take the other side of the trade at that price.
Accordingly, a limit order is only guaranteed a fill if the futures contract price trades at least 1 tick beyond the limit order price. For this reason, it is often said in the business that it "has to go through it to do it".

Simply put, if you have an order to sell the mini-sized Dow at 17,250 and that price is the high of the day, your order may, or may not, have been filled; but if the high of the day is 17,251 you are owed a fill.

Stop Order (AKA Stop Loss)

This order becomes a market order only when the specified price level is reached. This can mean that the futures market trades at the stop price, or the stop price has become part of the bid/ask spread. A commodity buy stop order is placed above the current futures market price, and a sell stop is placed below the current futures market price. In any case, a stop loss order is subject to the possibility of slippage on the fill. In other words, your fill price may be different that the stop price that you had originally named.

Fill slippage occurs because the stop loss order becomes a market order, it is not an “or better” order. Futures stop loss orders are most commonly used to “stop the loss” of a speculative position gone bad. For instance, a trader long December Corn futures from $5.00 might place a sell stop order at $4.80 to liquidate the position should the market go against the original speculation by 20 cents. Once again, slippage is possible. Simply placing a stop loss order at $4.80 doesn’t guarantee a fill at that price. The reported fill might be $4.79, or much lower depending on market conditions, volatility, and potential price gaps from the market closing price in one session to the opening price of the next. Nevertheless, in today’s electronic markets slippage is typically minor.

A stop loss order can also be used to enter a commodity market. If a trader believes a futures market might continue to rally once it breaks technical resistance, he could place a buy stop order to enter the market with a long position if prices rally to your stated price. To illustrate, if crude oil futures are trading at $62.00 per barrel, and you believe a break above $63.00 could open the door for a large rally, it might make sense to place a buy stop at $63.10. This order would execute a long futures contract for the trader if $63.10 is reached. If the commodity price never reaches the stop loss level of $63.10 the order will not be filled.

Trailing Stop Loss

Some, but not all, futures trading platforms and futures brokers offer the ability to enter trailing stop loss orders. This order type initiates a stop loss order which moves incrementally with favorable futures market movement. The parameters of the trailing stop loss order depend on the platform, and the discretion of the trader, but it typically involves some sort of measurement of tick price movement. For example, a trader that is short a futures contract might place a buy stop above the market to protect from losses. If the trader chooses to use a trailing stop loss order, he might instruct the platform to lower the stop by 5 ticks for every 5 ticks the futures price falls. Once the stop loss order is placed, or trailed, it will not back up; thus, if the stop order is trailed twice before the market reverses, it will be triggered at the last trailing stop price (which is 10 ticks lower than the original stop loss price).

One Cancels the Other (OCO)

This is also referred to as a contingency order because it requires that the commodity broker, or futures trading platform, cancel one of your orders should the other be filled. Not all futures brokers are willing to accept this type of order becuase of the risk of something going wrong (whether it be technical error, human error, or simply a fast moving futures market). For example, a trader long December Corn might simultaneously place a limit order above the market as a profit objective, and place a stop loss order beneath the market to limit the exposure to risk of an adverse futures price movement. If these are placed together as an OCO, execution of one of these orders would result in the cancellation of the other. As previously mentioned, if you place this order through your futures broker, he is taking on a substantial amount of responsibility with this type of order and will likely only do so on a full service basis. However, most trading platforms are capable of accepting this commodity order type for electronic execution. As a result, there isn’t nearly as much human intervention involved in OCO orders than was once the case.

The ease and access of OCO orders has greatly improved the convenience of trading commodity futures. Prior to advances in technology in the commodity industry, mis-executed OCO orders created a lot of chaos. Imagine the stress of being long or short a futures contract because the un-filled half of an OCO order wasn’t properly canceled, but was later inadvertently filled.

MIT (Market If Touched)

This order is similar to a stop order in that it becomes a market order once the specified price is "touched". However, it is also similar to a limit order because a sell order is placed above the current futures market price and a buy order is placed beneath the current price. In other words, this is a special type of limit order. Rather than the trader asking for a price or better, the trader simply wants to be filled at the best possible price should the market hit their stated MIT price. A market if touched order in a commodity market avoids the frustration of a limit order hitting the stated price, but going unfilled. However, it also opens the door for some slippage in the fill price.

MOO (Market on Open)

The market on open order type was born in the trading pits. Originally, it was an instruction to buy or sell a commodity futures contract on the open of the pit trading session. However, electronically executed futures markets have really changed the landscape of this type of trading because speculators are now able to place futures orders around the clock. There is no longer a morning “open”, or at least not an official one. Instead, most commodities open for trade in the afternoon prior to the day the trading session closes. To clarify, the futures markets open on Sunday night, and trade through Monday afternoon. On Monday afternoon, they close for a brief period (an hour or two for most futures contracts), then open back up for trading. The Monday afternoon re-open is considered Tuesday’s trading session.

Because of this change in logistics and timing, MOO orders have mostly dropped off most futures trading platforms. However, some trading platforms offer “timed” orders in which commodity traders can establish an order to buy or sell a futures contract using a market order at a time just after the open of trade, or at the time in day in which the open outcry trading pit previously opened when it was in operation.

MOC (Market on Close)

A market on close order is one in which the trader wishes to buy or sell a futures contract at the close of a trading session. Similar to the market on open designated order type, the MOC order is far less common in an electronic trading world but some platforms are capable of imitating the order type through “timed orders” which are released by the platform at a time of the day specified by the trader entering the futures order.

TAS (Trade at Settlement)

The trade at settlement (TAS) order type is essentially the new MOC order for the futures markets. A TAS order is placed by traders who wish to buy or a sell a commodity futures contract at the settlement price of the current trading session. A Trade at Settlement order is unique relative to the Market on Close because it gives futures traders the opportunity to name the acceptable fill slippage. This is necessary because it might not be possible to fill all of the TAS orders at the actual settlement price. Don’t forget, for every buyer of a futures contract there is a seller; therefore, in order for a TAS order to be filled at the settlement price of a commodity, another trader must be willing to take the other side of the trade at that price. Accordingly, TAS orders can be placed at 0, +1, or +2 (or at -1, or -2) to designate the number of ticks above or below the settlement price the trader is willing to accept as a fill price.

Iceberg Orders

The reference to iceberg stems from the idea that the “tip of the iceberg” is the only visible part of a large mass of ice emerging from a body of water. Accordingly, the term “Iceberg Order” is defined as the practice of breaking an order to buy or sell a large quantity of contracts into multiple smaller orders through the use of automated software. As the futures markets moved from open outcry execution to electronic, this order type has become increasingly more popular. This is because those traders, whether retail or commercial, trading large quantities typically prefer to mask the true volume from view of others. In other words, iceberg orders enable the “public” to see only a small portion of the actual order at a time.

Most futures trading platforms offer the ability to view DOM (Depth of Market) data in which it is possible to observe the working buy limit and sell limit orders of other traders. These working orders on display are often referred to as the “book”. Some traders monitor the trading book for large quantity orders. In theory, large buy orders indicate the market might be inclined to move higher, or at least it suggests that a large player, or players, believes it will. These inferences, whether right or wrong, can influence prices and possibly prevent the entity placing the large quantity to be filled at their desired price. As a result, funds and institutions placing sizable orders have incentive to mask the true quantity of their order. Simply put, those using iceberg orders do so under the belief that it will reduce the impact the order has on price movement as it is absorbed into the market.

When an iceberg order is placed, the trader determines the disclosed volume which will be placed as a regular limit order, and the hidden volume which is only placed once the first tranche is filled. For most retail traders, iceberg orders are not necessary but the ability to execute them is available on most futures trading platforms, so it is a good idea to understand what they are. However, it is typically not a good idea for average retail traders to use this order type. After all, those trading small quantities will have little or no impact on prices so there is no need to disguise the quantity. Furthermore, because the hidden quantity is only placed after the disclosed quantity, it will fall to the bottom of the priority list in the exchanges trade matching system. In other words, traders unnecessarily using iceberg orders are reducing their odds of getting filled at their limit price.

GTC (Good 'Til Canceled)

As the name implies, good ‘til canceled orders, often called open orders, are always considered active until filled, canceled, or replaced by another order. Beginning futures traders have been known to place GTC orders and forget about them only to find that disaster has struck while they weren't watching. If you are gong to use GTC orders make sure that you properly monitor them. Most platforms and commodity brokers assume futures orders are “day orders”, meaning they are canceled at the end of the trading session if they aren’t executed. Consequently, when entering futures orders intended to be active until otherwise canceled, it is necessary to convey it as such.

Straight Cancel (Straight "Can")

This completely eliminates a previously placed order. Keep in mind, a futures “market” order cannot be canceled because it will be filled immediately.

Cancel/Replace (Modify)

This cancels and replaces a previous order by changing the price, type, or quantity, but you cannot replace the commodity or contract month. Depending on the futures trading platform being used, it might or might not be possible to modify a working order into a GTC (Good ‘Til Canceled) order designation.

In most commodity futures markets it is possible to cancel/replace a working stop loss or limit order into a market order, but futures contracts traded on the ICE exchange (Intercontinental Exchange), typically cannot be modified into a market order. In this instance, it is necessary to cancel the existing order outright, and enter a brand new futures order ticket to buy or sell the futures contract at the market price.

A New Look at an Old Futures Trading Topic

There are an unlimited number of ways to skin a cat, and trading is no different. Despite your futures trading strategy, risk tolerance or trading capital, having a plan is one of the most important components of achieving success in these treacherous commodity markets. However, we believe that the most important characteristic of a profitable futures and options trader is the ability to adapt to ever-changing market conditions. Assuming this, it seems logical to infer that a commodity trading plan should be established; nevertheless, just as rules are meant to be broken, futures trading plans should be flexible to accommodate altering environments and new events.

The premise of properly planning a commodity trade is similar in nature to a business plan. It is a relatively detailed outline of the structure of the futures and options speculation and the contingency plan, or plans, should the market go against the trade. Once again, I believe that trading plans should not necessarily be set in stone; behaving as if they are could lead to financial peril.

There are two primary components of a commodity trading plan: price prediction and risk management. Price prediction is simply the method used to signal the direction and timing of trade execution. This may involve fundamental or technical analysis, or both. Risk management specifies when to cut losses, when and how to adjust a position, or better yet when to take profits.

Commodity Futures Price Speculation (Hopefully Prediction)

The only way to make profitable futures and options trades is to buy low and sell high. This is true whether you are trading derivatives, or baseball cards. Although it is a simple concept in theory, in practice, it is much more difficult to implement than one may think. In order to successfully buy something at a low price and sell it at a higher price, the trader must first be accurate in his speculation.

Determining an opinion on where commodity market prices could, or should, go is only half the battle. Once you have done your homework in both fundamental and technical analysis, you must be able to construct a prospective commodity trade that will be profitable if you are correct and hopefully relatively painless if you are wrong.

Timing is Everything when Trading in Commodities

In futures and options trading, timing is everything. I constantly remind my clients and prospects that there is a big difference between being right in the direction of a commodity market and actually making money. I have witnessed traders be absolutely correct in their speculation of futures price movement, but miss getting into the trade due to unfilled limit orders, or entering the commodity position too early (which can cause the trader to run out of money or patience before the price move occurs).

Attempts at commodity price prediction can be based on technical oscillators, psychological barometers, supply and demand, or anything else that provides clues to price direction and timing. I am a firm believer that there aren't right or wrong trading tools but there are right and wrong ways to use them. Simply put, trading indicators can be compared to guns; guns don't kill people, people kill people. In trading, oscillators or charting tools don't siphon trading accounts; unfortunately traders sometimes do it to themselves by acting too aggressively to trading signals, or ignoring them altogether.

Further, while it isn't important which indicator you use to time a futures trade entry and exit, it is important how comfortable and confident you are in using it. This is especially true in reference to computer generated oscillators such as the MACD and Slow Stochastics. In the long run, I believe blindly taking all buy and sell signals triggered by such indicators would yield similar results. Accordingly, the primary factors playing a part in whether a trader experiences profits or losses are likely the ability to avoid panic liquidation, properly placing commodity risk management techniques in place, and exiting option trades that have gone bad before it is too late. In other words, I believe that good instincts and experience are more valuable than any technical indicator, or supply and demand graph, that you will run across.

Once you have determined your speculative tool of choice and determined your conclusion on the direction, or lack of, it is time to construct a strategy that will benefit if your assessments are accurate and mitigate risk if you are wrong. This may include the use of options, futures or a combination of both. The method that you choose should be based on your risk tolerance, personality and risk capital.

Options, Futures, or Both

Commodity speculators have an unlimited number of "options" when it comes to trading vehicles. The key is to find an approach that will provide you with a manageable risk profile, while still leaving the potential for a profit that you will be satisfied with. Throughout the process, keep in mind that the relationship between risk and reward isn’t linear. Only a fine balance between the two will allow the trader the probability of a reward rather than the dream of one. Accepting reckless amounts of risk may pay off for a lucky few, but for the masses the results will be dismal.

Depending on the characteristics and personality of the trader, a stock market bull might purchase an e-mini S&P futures contract, purchase an e-mini S&P 500 call option, sell an e-mini S&P 500 put option, or even use a combination of long and short options and futures contracts, to construct a trade with various risk and reward prospects.

Likewise, a crude oil bear might opt for a limited risk option spread such as an iron butterfly or he be willing to accept large amounts of risk and volatility by choosing to short a futures contract outright. I couldn't possibly touch on each of the commodity market strategy possibilities in within the realm of this article but you should be aware of the opportunities available to you, and which fits your personal trading profile, before ever putting money on the line. If you are interested in exploring commodity trading strategies outside of simply buying or selling a futures contract, you might find my book “Commodity Options” helpful. It outlines several commodity option spreads and even synthetic strategies in which futures and options are combined to construct a hedged position in the futures markets.

Risk Management is Imperative when Trading in Commodities

The "meat" of a proper futures trading plan is risk management. This is concerned with establishing thresholds of loss that you are capable and willing to accept in exchange for potential rewards. In the case of futures traders, this may simply mean picking a stop loss price and placing the order in conjunction with a profit target (limit order).

Once again, trading plans are for guidance and shouldn't be followed blindly. Don't be the futures trader that misses taking a healthy profit while trying to squeeze out an extra $20 because the price came within ticks of a working limit order but failed to trigger. Also, even if your trading plan doesn't involve a trailing stop don't be a fool. Markets don't go up or down forever, if you have a large open profit tighten your stop loss order, or place protective options or option spreads and walk away.

Managing Commodity Market Risk is an Art not a Science

Creativity can be a valuable tool in futures trading. Think beyond the traditional practice of using stop loss orders to manage risk, because there are an unlimited number of possibilities. For instance, experienced futures traders might choose to incorporate selling option premium against a correctly speculated futures contract as a form of risk management. Doing so converts the trade into a type of “covered call” or “covered put”. The premium collected from the short option not only produces income, but it provides a hedge against a price reversal. This is because a long futures contract and a short call option benefit when the market moves in the opposite direction (they counter act one another). Likewise, in-line with this strategy you may want to use the proceeds of the covered call or put strategy to purchase an option to protect your risk of an adverse futures price movement.

As you can see, well-informed traders have a plethora of strategies to adjust the risk and reward of a futures position. A trading plan couldn't possibly cover all market scenarios, and adjustment possibilities, but writing down a few potential ideas may keep you from freezing in the heat of the moment.

If you are interested in exploring the endless possibilities in regard to futures trading management, and strategy creation, please visit our futures and options trading educational video archive.

Risk and Reward: Give Yourself a Chance!

When deciding how much risk you are willing to take in the commodity markets and setting your profit objectives, you must be realistic. Beginning futures traders are often surprised to hear that many of the best traders struggle to keep their win/loss average above 50%. With these odds in mind, it doesn't make sense to consistently risk more on a trade than you hope to make should you be right. For instance, if your average risk is $500 you should have an average profit target of at least $500. Anything other than this puts the odds greatly in favor of your competition.

Commodity Option Sellers Face Optimal Win/Loss Ratios but That Doesn't Guarantee Success

Because more options than not expire worthless, commodity option sellers often have much better win/loss ratios than futures traders. However, the drawback of an option selling strategy is the reality of accepting theoretically unlimited risk in exchange for limited profit potential. In the game of commodity option selling, winning far more trades than you lose is only the beginning. An option seller must be savvy enough to prevent the small percentage of losing trades from wiping out months of profit. My intention isn't to deter you from selling options, in fact this is the strategy that I prefer and recommend as a commodity broker to my clients. However, those that partake in this practice must be ready and willing to face the consequences during draw-downs.

U.S. futures exchanges don’t accept stop loss orders on options. Even if they did, it wouldn’t be in the best interest of traders. This is because it wouldn’t be feasible to place stop orders on most options, or option spreads, due to the nature of the bid/ask spread and the seemingly high probability of being stopped out prematurely. Remember, a stop order becomes a market order as soon as the named stop price becomes part of the bid/ask spread. If the bid/ask spread is wide due to a lack of liquidity, a stop order will be triggered and filled at a dramatically inopportune time and price (unfavorable slippage).

Instead of placing stop loss orders, short options should be monitored closely; keeping a "mental" stop in mind is important. I typically advise traders to use a double out rule. This means for every naked short option, whether it is within an option spread strategy or sold individually, you should strongly consider buying it back at a loss if its value doubles from your entry point. In essence, if you sell a crude oil option for .50 cents or $500 ($10 x 50) and following your entry the option doubles in value (appreciates to $1.00 or $1,000) it may be fair to say that you were wrong. At this point, a trader should strongly consider liquidating the position and moving to the next opportunity. Failure to do so may convert a moderate loss into something much more.

Unfortunately, in fast moving markets the value of an option sometimes explodes in value very quickly, making the double-out rule impossible to implement. Even so, the double out rule should be part of the overall trading plan. This doesn't necessarily mean it is an exact science; trading is an art and should be treated as such. Imagine being short a put option in a declining market that has reached the designated double out point, but the market is approaching significant support. If you strongly believe that the futures price will hold support, exiting your position at top dollar in panic, doesn't make sense. However, on the flip side; if you find yourself counting on hope rather than rational logic, you have let it go too far. Sometimes the line is difficult to see until it has already been crossed but its times like this that make or break a trader. I believe the ability to properly manage these scenarios come from instinct and experience; it cannot be attained from reading a book or attending a seminar.

The 10% Rule in Trading

Many futures trading courses and literature claim that a commodity trader shouldn't risk more than 10% of their trading account on any one trade. This seems to be relatively sound advice but might, or might not, be feasible for everyone. For example, a risk averse trader may not be psychologically equipped to handle such a loss which can easily lead to irrational trading behavior. On the contrary, a well-funded-trading account might be risking a substantial amount of money if risking 10% of the commodity trading account.

Most beginners underestimate the value of psychology. Once the balance is broken it is hard to regain logic and can lead to large losses. For example, a trader that opens an account with $10,000 and immediately loses $1,000 on the first trade may dedicate subsequent trades to recovering losses sustained on the original. In other words, they are often tempted enter a market prematurely and aggressively to make up for lost ground. This behavior would demonstrate an example of a trader that simply isn't capable of taking such a large loss without detrimentally impacting the original trading plan.

An additional drawback of the 10% rule is the fact that during volatile market conditions, whether trading options or futures and depending on the risk capital available, it may not be possible to construct a trade with reasonable odds of success without surpassing the appropriate percentage. In this case, the market is often best untouched, but as humans we are naturally drawn to that of which we shouldn't.

Leave Multiple Contract Trading to the Pros and Well Capitalized

As a long-time commodity broker, one of the most destructive things that I have witnessed traders do is execute multiple futures contracts in a moderately funded account. Inexperienced traders are under the assumption that trading several futures contracts simultaneously will maximize their "return", but what they are actually doing is maximizing risk and minimizing the probability of a successful trade. Despite the emotions involved, commodity trading isn't about feeding your ego it is about making money...right?

Stop the Loss!

Futures traders often look to manage risk of loss through the use of stop loss orders. A stop order instructs the broker to exit an outstanding futures position if market prices move adversely enough to reach the named price. However, keep in mind that a stop order can also be used to enter a market. Such a stop order is often placed above areas of significant technical resistance or below support in an attempt to capitalize on a potential price break-out.

In order for stop orders to be effective, they must be properly placed. Anything less will result in either too much risk, or premature liquidation of a trade that may eventually go in favor of the position. This too is an art and not a science. Where stop orders should and shouldn't be placed isn't a black and white decision. There are many areas of gray involving market conditions and characteristics as well as the personality, account funding and risk tolerance of the commodity trader.

If you are a beginning trader this may be a good argument in favor of using a full service commodity broker. However, you must realize that even a well experienced futures broker or advisor can't see into the future and is subject to the same frustrations as you may be. Nonetheless, in theory she may be a little more savvy, and that could have a positive impact on performance in spite of the slightly higher commission rate.

Be warned, stop orders aren't a guarantee of risk. Because a stop order becomes a market order once the stated price is reached, there may be slippage; in rare cases, a substantial amount of slippage. An experienced commodity broker might be able to help you in constructing an option strategy to be used as an alternative in risk aversion. The use of options in place of stop loss orders provide traders with additional lasting power because it eliminates the possibility of being stopped out of a commodity market on a temporary price spike. For example, a short option or futures position may be hedged by a one by two ratio write if the volatility and premium allows.

The ability to place a stop order or limit the risk of a futures trade through options and option spreads should eliminate some of the stress and emotion involved in trading. Rather than losing sleep over a trade gone bad, those with stop orders or protective option positions (insurance) can relax knowing that he has done his homework and has mitigated his risk in commodity trading.

It is Your Money

We don't all wear the same shoe size, or have the same hobbies, so why should we all use the same trading strategy and risk management techniques? The truth is that we shouldn't. My perception of what constitutes reasonable timing of entry, and how much money and emotion to risk on a particular trade, is likely far different than yours. Commodity trading is an ambiguous game; there isn't a right or wrong answer to most aspects of speculation. For example, the same trading "ingredients" may work for one person but not for another due to differences in experience, education, risk capital and emotional constraint.

Only you will be able to determine what works for you; discovering what that is requires patience, discipline, and an open mind. The most important feedback on your progress will be your commodity account statements. This isn't to say that you should hang up your trading jacket if you experience a drawdown, or even a complete account blow up, but it is important that you are realistic. Some people tend to only remember the good trades and others only remember the bad. Each of these distorted perceptions of reality can have an adverse effect on your commodity trading. Successful traders remember the good trades and the bad trades, but most importantly learn from all of them.