Maybe it was pre-Friday-the-13th jitters. Perhaps it was reports that Iraq supplied al Qaeda with VX nerve gas. Maybe traders are uneasy ahead of Friday's wholesale inflation, producer price index report. The reasons for a rally to a contract high in February gold (GCG2:COMEX) and a decline to a contract low in the March dollar index (DXH3:NYBOT) don't matter.

What is important is what these moves say about investor sentiment. The move to a high of 333.50 in February gold shows the market is afraid and that it doesn't want to be caught holding long dollar positions ahead of the weekend.

Flight-to-safety moves were also seen in the rally to a three-week high in March T-bonds (USH3:CBOT) and to a near-contract high in the March Swiss franc (SFH3:CME). Moves in these traditional safe-haven vehicles work to confirm the prevalence of fear throughout the markets.

All told, the flight-to-safety moves demonstrate that fear is dominating the market's mood. That's bearish for stock index futures, good for precious metals and bad for the buck. Chavez's conundrum in Venezuela and growth-stifling higher oil prices can only sour the mood.

How might this affect trading Friday? Thursday's show of fear enhances the odds that stock index futures -- March Dow (DJH3:CBOT), S&P (SPH3:CME), and Nasdaq 100 (NDH3:CME) -- will trigger out of their pullback from one-month low setups and continue their recent slide. The fear factor could also fuel upside momentum in gold and March silver (SIH3:COMEX).

Honor Thy Stop

In trading, identifying and entering trades is only part of the game. Money management is by far the most important -- and least often discussed -- element in obtaining consistently successful results.

While we'd all like to put on winning trades 100% of the time, there's no way that's going to happen, so using a viable money management program is tantamount to success.

Let's follow up on some recently discussed trades in order to provide a clearer understanding of my approach to trade position management.

One of the elemental objectives in position management is to clearly define the risk and protective stop before entering every trade. Last Friday, I pointed out that February hogs (LHG3:CME) were poised to make a larger-than-expected move out of a low-volatility situation and that recent momentum and subtle clues within its current chart configuration suggested any outsized move would resolve to the upside. Hogs did make a big jump, but to the downside, the opposite of the expected direction.

I should mention that because I was already long, I was waiting to add to my hog position out of a pullback. I would have added new long positions had hogs traded above the high of the low bar in the pullback. This never occurred, and therefore a fresh long position was never initiated, limiting my risk.

Now with the existing long position, my protective sell stop was at 53.925, just a few ticks below the whole number (54.000) and below the 10-day moving average. The 10-day moving average was key because hogs hadn't closed below that line for more than one day in the past two months. The 10-day moving average also coincided with the lowest close within the narrow-range consolidation, the top of a lap or window on the chart as well as tight Fibonacci support. All of these factors conspired to define my stop-out point on the trade at 53.925 and got me out the day before the market locked limit down.


Lean Hogs
Source: QCharts

The Harvest

Managing winning positions -- harvesting profits -- is perhaps an even more difficult aspect of money management than setting initial protective stops because optimal exiting requires greater subjectivity in order to maximize gains out of positions.

Consider the countertrend, contrarian short trade setups noted on Dec. 4 that -- unlike hogs -- did work out as expected. The setups in March sugar (SBH3:NYBOT) and coffee (KCH3:NYBOT) were to fade, or trade in the opposite direction of, the one-month highs in these contracts. Swift gains came from the short positions, but where and when should one take profits?

Because these were both countertrend trades, the profit objectives were short term. In both sugar and coffee, the objective was to harvest profits at the 50% retracement of the most recent, prominent swing or to exit on a close above the 10-day moving average, whichever occurred first.

As the following charts show, both sugar and coffee hit their 50% retracement objectives before closing above their 10-day lines. Once the 50% objective is hit, I always exit one-third or more of a position. This has the psychologically freeing effect of allowing you to play with the house's money, and keeps you in the game to maximize gains.

After all, who knows how far a market will travel in a given direction? Keeping a portion of the position lets you find out how far a position might run. The entire position is liquidated on a close above the 10-day moving average.


Sugar
Source: QCharts


Coffee
Source: QCharts

Marc Dupee is an independent trader and co-author of the book The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Marc Dupee.

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