What sets futures trading apart 2. Bottom-Up vs. Top-Down Attack 3. Why Traders Make Mistake No. 1 8. Unfortunately, many individuals seem to be lured into futures trading for many of the wrong reasons.
The Four Biggest Mistakes In Futures Trading 1. Lack of a Trading Plan
Using Too Much Leverage 3. Failure to Control Risk
If you are currently trading futures without success or have done so in the past, you may be about to take a cold, hard look in the mirror and you may not like what you see. But just like anything else that might make you look in the mirror, the most important question you need to answer isn't.
Why Do Traders Make This Mistake I How To Avoid This Mistake
MISTAKE #1
The answer to the question “why do traders make this mistake” could probably apply to all the mistakes in this book. Unfortunately, most people tend not to focus on the "attainment" part of the process, but rather on the "post-achievement" period.
The Recipe For Trading Success (That Nobody WantsTo Hear)
The Litmus Test
- Go to your bank on a windy day
- Withdraw a minimum of $10,000 in cash
- Walk outside and with both hands starting throwing your money up into the air
- After all of the money has blown away, go home and sit down in your favorite chair and calmly say,
- Get on with your life
In developing a business plan there are many questions to answer and many different possible answers.
How Much Capital Will You Commit To Futures Trading
Whatever amount you decide to commit, you must deposit the entire amount into your brokerage account. Think seriously about how much you can really afford to commit and then commit the entire amount.
What Market or Markets Will You Trade
The retail trader pays the difference between the bid and the ask and the market maker pockets the difference. In theory, the difference between the bid and ask is a risk premium intended to give market makers some incentive to accept the risk of making markets.
What Type of Trading Time Frame Is Best For You
In this case, the lure of easy money – the idea that he could “trade in and out” a few times a day and pick up some extra money – was so enticing to this person that he made the mistake of not admitting to himself that his schedule was simply not suitable for day trading. If you took a successful long-term trend follower and forced him to trade fifteen times a day, he would also be like a fish out of water and would no longer be a successful trader.
What Type of Trading Method Will You Use
The system trader may start to question his system after a particularly bad trading period, but that's a much easier position to be in than the subjective trader who just made three big mistakes back-to-back. What this means is that you may be able to carry much less emotional baggage than the subjective trader.
What Criteria Will You Use To Enter a Trade
What Criteria Will You Use To Exit A Trade With A Profit
What Criteria Will You Use To Exit A Trade With A Loss
When a trade goes wrong, many traders take it personally and have a hard time admitting that they were 'wrong'. Yet one of the great ironies of futures trading is that often the best you can do is take a loss and exit a trade before your loss becomes too great. You can use tight stops, you can use wide stops, you can use stops that vary depending on volatility, and so on and so forth.
A Word Of Advice: Adhere to the Four Cornerstones
If you have a winning trade and you take a profit, you no longer let your profit run. Conversely, if you have a big winning trade and you let it run, you risk letting a big winner slip away.
MISTAKE #2
A stock's price usually rises or falls based on a company's earnings per share, or more specifically, public opinion about that company's earnings outlook. Thus, based on the perception of lower supply, one could expect the price of soybean futures to rise.
Understanding Leverage
As this is written, the amount of margin required to trade one soybean contract is $750. There is no single best way to arrive at the "perfect" amount of capital to use for trading a particular portfolio.
The Role of Mechanical Trading Systems
To obtain the most useful results, it is best if you have a method available to generate a trade quote for each market you intend to trade using the approach you have chosen. If you have actually been trading for a while, you may be able to use your previous monthly statements to obtain the necessary data.
Determining The Amount of Capital Required to Trade One Market
Trading with less than the suggested amount of capital will likely result in a total loss of capital. Trading with more than the suggested amount of capital will result in an exponential drop in percentage returns compared to using the 'correct' amount.
Calculating Optimal f
Unfortunately, the common response to such a possibility is, “That probably won't happen to me.” This is not the correct response. Anyone who was long crude at the previous close was immediately $7,500 poorer per contract.
One Caveat to Analyzing Trading System Results
Arriving at a Suggested Dollar Value Per Contract
Using margin times three results in the same proposed amount of capital regardless of the performance of the system used. For the Japanese Yen, the initial margin requirement (at the time of writing) is $3,000 and this is the biggest gap overnight.
Arriving at an “Aggressive” Suggested Account Size
Arriving at a “Conservative” Suggested Account Size
Multiplying the standard deviation of the monthly returns by three gives us a dollar value that covers 99% of all previous monthly gains or losses. By dividing this value by .1, we are trying to ensure a 99% probability that the monthly loss will not exceed 10%.
Arriving at an “Optimum” Suggested Account Size for Your Portfolio
We multiply this value by three to get $4,500 and then divide that value by 0.1 to arrive at a suggested "conservative" account size of $45,000. If future results are similar to past results, then by trading this account with $45,000 there is a 99% probability that the monthly drawdown will not exceed 10% (or $4,500 in this case).
Digging a Little Deeper
F) % of profitable 3-month periods - For our example portfolio, 79.8% of all 3-month periods were profitable. G) % of 12 month periods profitable - For our example portfolio, 98.3% of all 3 month periods were profitable.
MISTAKE #3
Victor Neiderhoffer was a highly successful futures trader for many years (his managed accounts averaged a 31% annual return over a 13-year period) and the author of the best-selling book "The Education of A Speculator." In October 1997, the fund created by Mr. be managed. In fact, most traders would benefit from the "fear" of the markets more than they currently do.
Risk Control Method #1: Diversification Among Different Markets
At the same time, you don't want to give up a large portion of your upside potential in the process just to achieve a smooth stock curve. Note that the portfolio trading with just the three interest rate contracts actually made more money over a four and a quarter year test period than the diversified portfolio.
Risk Control Method #2: Diversification Among Trading Time Frames and Methods
If the short-term and long-term trends are both up or both down, the trader will have his maximum long or short position of two long or two short contracts. If the trends are out of sync or if the two are neutral, why would a trend follower want a large exposure to the market anyway.
Risk Control Method #3: Proper Account Sizing
Or worse, if you really didn't know what to expect in terms of pumping when you started and suddenly find yourself deep in a hole. By properly sizing your trading account, you take an important step towards reducing your risk even before you make your first trade.
Risk Control Method #4: Margin-to-Equity Ratio
You then divide this sum by the equity in your trading account to get your margin-to-equity ratio. In other words, most traders would be well advised to keep their margin to equity ratio below 30%.
Risk Control Method #5: Stop-Loss Orders
Bond contracts sitting in the market place for fear that someone might get wind of it and “run their stop.”
The purpose of a stop loss order is not to improve the performance of your system. Similarly, the purpose of a stop loss order is not directly to increase the profitability of your trade.
MISTAKE #4
Do you trust the approach that you spent so much time developing and perfecting (and that in the back of your mind "failed" you last time, while you, Mr. Supertrader, instinctively knew it would fail, so you accepted it heroically matters in your hands and won the day), or your "gut" instincts. Of the four biggest mistakes in futures trading, lack of discipline is the most difficult mistake to avoid.
Overcoming The IQ Obstacle
If something doesn't make sense to them, it needs to be analyzed so that an understanding can be gained. In futures trading, trying to understand why something happens can be an expensive exercise in futility.
A Word of Advice: Don’t Think, React
If a situation arises that you have already determined exactly what to do in the event of just such an event, then react and do it. If a situation arises for which you have not prepared and you have no idea how to react, think in terms of risk control.
Avoid Simple Traps
He stubbornly continues to hold on because he doesn't want to miss "the big rally". Shouldn't I be trying to improve my system?” "Doesn't it make sense to look at ways to make and close deals more efficiently?" "And if so, by ignoring point A to point B and point C to point D, am I not ignoring possible useful information that could improve my trading results on future trades?" The answers to these questions are "yes", "yes" and "yes". However, the time to address these questions is NOT when you are in the middle of a trade.
System Development Versus System “Tinkering”
In the minds of most system traders, the best trading system is the one you haven't developed yet. This is when you want to analyze point A to B and point C to D for past trades to determine if you can improve the efficiency of your entry and exit.
Asking The Right Question
The hardest thing to do – and the right thing to do – is to make the transaction anyway. The hardest thing – and the right thing to do – is to cut your losses and move on.
CONCLUSION
The next day you pick up the paper and the story reads "...and Crude closed unchanged in dull trade." Think back to when you were a kid and you stole a cookie from the cookie jar despite specific instructions not to.
Standard Deviations
Trading Resource
Guide
SCHWAGER ON FUTURES: FUNDAMENTAL ANALYSIS by Jack Schwager - The most comprehensive guide to using fundamental analysis exclusively for futures traders from the author of the runaway bestsellers, Market Wizards and New Market Wizards. Acquire the skills to apply fundamental analysis to futures trading with this complete practical guide.
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About the Author and Essex Trading Company, Ltd
Together, Wesolowicz and Kaeppel have developed several software programs, most notably the award-winning Futures Pro and Option Pro On-Line programs.
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