In a moment of truth for every commodity trader, understanding how and when to square off an open position can be the difference between securing a nice profit and seeing profits evaporate. Yesterday, traders on exchanges displayed exactly how critical the process of squaring off is when trading futures contracts for everything from gold and silver to crude oil and natural gas.
What Does “Squaring Off” Mean?
In commodity trading terminology, to square off is to close all your existing positions by taking an opposite position of the same quantity. If you’ve bought (gone “long”) 10 gold futures contracts, you square off by selling the same 10 contracts. If you’ve sold (gone “short”) 5 crude-oil contracts, you square off by covering 5 contracts.
Why Squaring Off Matters
- Booking Profits or Curbing Losses
– When a trade moves in your favour, squaring off lets you lock in gains.
– If the market turns against you, closing the position prevents further losses. - Managing Risk
– By exiting positions at planned price levels, traders keep market exposure under control.
– Stop-loss and take-profit orders can automate much of this process. - Avoiding Physical Delivery
– Futures contracts may require physical delivery of the underlying commodity at expiration.
– By squaring off before expiry, most traders sidestep the logistical—and often costly—burden of taking or making delivery.
Four Common Ways to Square Off
| Method | How It Works |
|---|---|
| Offset Square Off | Place an exact opposite order (same size) to neutralize your current position. |
| Opposite Trade | Sell more (or buy more) than your current position to not only close but also reverse your market view, potentially capturing fresh profits. |
| Intraday Square Off | Close all positions before the trading session ends to avoid overnight risk from news or price gaps. |
| Automatic Square Off | Exchanges or brokers may automatically close out your positions at set times, on expiry, or if losses breach pre-specified thresholds. |
Tips for a Smarter Square-Off Strategy
- Pre-define Your Levels: Always set take-profit and stop-loss orders when you open a trade.
- Use Alerts & Trailing Stops: If you ride a trending move, let a trailing stop lock in gains as the market pushes higher (or lower).
- Know the Clock: Be aware of any automatic square-off timings imposed by your broker or exchange—often minutes before market close or contract expiry.
- Avoid Last-Minute Rush: Liquidity can dry up near the close, leading to slippage. Plan to exit a little earlier if your targets haven’t been hit.
Real-World Example: Gold Futures
Late yesterday morning, a trader purchased one lot (1 contract) of gold futures at ₹75,000 per 10 grams, expecting prices to climb. They set:
- Take-Profit at ₹75,750
- Stop-Loss at ₹74,500
When the gold fell to ₹75,750 in the later part of the session, the take-profit order automatically kicked in—selling one unit at that price and earning a profit of ₹750 per 10 grams. If the price had dropped to ₹74,500, then the stop-loss would have been activated, limiting losses to ₹500 per 10 grams.
The Bottom Line
Entering a trade is only half the journey—knowing when and how to exit is equally crucial. Whether you’re locking in profits, limiting losses, avoiding physical delivery, or simply adhering to a disciplined plan, mastering the square-off process in the commodity market keeps your strategy on track and your risk in check.
Stay informed, stay disciplined—and square off smartly.
