A trade stays open and the profit or loss is just on paper until it is closed. Closing the trade helps traders see the real profit or loss.
Commodity prices can change a lot and sometimes go up and down quickly. Squaring off allows traders to close their losing positions early, which helps avoid bigger losses later.
Futures trading needs traders to keep some money aside as a margin. When you close a trade, that money becomes available again, which lets the trader open new trades.
Commodity exchanges such as MCX require traders to close out their positions by a certain time, especially for trades done during the day or close to the expiry date.
Most retail traders don`t want to take physical possession of commodities such as gold or crude oil. Squaring off means closing the position before the expiry date to avoid having to deliver the actual commodity.
Types of Square-Off in the Commodity Market
There are several ways to square off a position, depending on the type of trade and strategy.
1. Intraday Square-Off
Intraday commodity traders buy and sell positions within the same day. Many brokers automatically close these positions near the end of the trading day to prevent risks from holding positions overnight.
For example:
- A trader buys 1 lot of Crude Oil futures at 7:00 PM and sells it at 10:00 PM. This is an intraday square-off.
2. Manual Square-Off
The trader can manually place the reverse order to close the trade at any time before it expires. This approach allows them to exit when it`s most beneficial.
3. Auto Square-Off by Brokers
Brokers use a "square-off policy" to keep clients safe when their account balance gets too low. If a trader`s available funds fall below a set limit, the broker might automatically close their open trades to prevent losses.
4. Square-Off at Expiry
If a trader does not exit a position before expiry:
- Cash-settled contracts automatically get squared off at the settlement price.
- Physically delivered contracts may require taking or giving delivery unless squared off in advance.
How the Square-Off Process Works
The square-off process can be understood in three simple steps:
Step 1: Identify the Open Position
A trader checks their existing open positions-buy or sell-in any commodity futures or options contract.
Step 2: Place an Opposite Order
To square off:
- Place a sell order for a long position
- Place a buy order for a short position
The order must be in the same contract month, quantity, and product.
Step 3: Confirm Trade Execution
Once the other trade is completed, the position is closed. The actual gain or loss from the trade is shown in the P&L section of the trading platform.
Square-Off Example
Suppose a trader buys:
- Gold Mini Futures (1 lot) at Rs60,000 per 10g
Later in the day, the price rose to Rs60,300. The trader sells the same contract to square off.
Profit per 10g = Rs300
Total profit = Rs300 x lot size
By taking the opposite trade, the initial long position is neutralized and the P&L is realized.
Key Factors to Consider Before Squaring Off
1. Market Trends
Analyzing charts, indicators, and global commodity trends can help you square off at the right time.
2. Volatility
High volatility can rapidly change P&L. Traders should avoid emotional decisions.
3. Margin Level
If the margin goes below the required level, brokers might automatically close positions. It`s important to keep track of your margin.
4. Expiry Dates
Always track contract expiry dates to avoid last-minute forced closure or physical delivery.
5. Trading Strategy
Square off should align with the trader`s plan—whether intraday, swing, or hedging strategy.
Common Mistakes Traders Make in the Square-Off Process
Even seasoned traders sometimes make errors in closing positions. Here are some common mistakes:
1. Forgetting to Square Off Before Expiry
This can result in unwanted physical delivery or additional charges.
2. Misjudging Market Momentum
Exiting too early or too late can affect profits. Proper technical and fundamental analysis is key.
3. Relying Entirely on Auto Square-Off
Relying only on broker auto square-off can lead to unfavorable exit prices due to volatility.
4. Not Monitoring Margin Levels
Trade may get force-closed at a loss due to low margin, even when the market position was likely to reverse.
5. Confusing Contract Months
Squaring off in the wrong contract month does not close the original position.
Best Practices for Effective Square-Off
To improve trading outcomes, consider the following best practices:
1. Use Stop-Loss Orders
A stop-loss helps automatically exit a losing trade, reducing risk.
2. Set Profit Targets
Have a clear exit plan before entering a trade.
3. Monitor Global Commodity News
Global events significantly influence prices of crude oil, metals, and agricultural commodities.
4. Use Technical Indicators
Tools like RSI, MACD, and moving averages can guide precise exit points.
5. Track Broker Notifications
Brokers often send alerts before auto square-off or contract expiry.
Conclusion
The square-off process in the commodity market is a key part of trading that every trader needs to know about. It helps control risks, lock in profits, prevent having to take physical delivery of the commodity, and keeps your margin levels in check. Whether you trade for the day or hold positions for longer, understanding when and how to square off can greatly affect your trading results.
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