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Prop Trading Futures

Why You Would Fail…

Trading the FOREX and futures markets can be extremely rewarding, but it can also be extremely treacherous if you don’t have a solid trading plan in place. One of the biggest mistakes a beginning trader can make is to risk their hard-earned money in the markets without first developing some type of systematic trading methodology. Any experienced trader will tell you that if you trade without any plan or any rules, it’s only a matter of time before you crash and burn. As the old saying goes, “If you fail to plan, you plan to fail.” This rings especially true in the realm of Forex and futures trading.

It’s been proven over and over again that 98% of all traders consistently lose money in the markets. There is little doubt that the majority of traders in that unfortunate statistic approach the markets with more of a “gambling” mentality instead of employing a very disciplined and methodical plan. After all, trading is a business, and it should be treated as one in order to conserve capital, maximize winning trades, and minimize losing trades as much as possible. Trading veterans will be the first to tell you that trading without a written plan is equivalent to inviting financial disaster into your life. One irrefutable fact about the markets is that they do not conform to any one trader’s whims or wishes. It doesn’t matter how emotionally tied to a position you may be; if you’re wrong, you’re wrong, and the markets will quickly inform you of that fact.

All too often traders will stay in losing trades too long and exit winning trades too quickly, allowing the emotions of fear and greed to keep them from applying solid logic to their trades. After all, it’s very easy to enter a position based on a particular expectation (long or short), and then start switching mid-stream if the trade quickly moves against you. Many traders will then reverse their position in order to regain some of the money they’ve lost, only to be on the wrong side of the trade again when the market turns back in the other direction. This is known as getting “whipsawed” in the markets, and this type of emotionally-driven trading has been the demise of many novice traders. If you want to achieve profitability and longevity in the markets, you simply cannot afford to operate in such an undisciplined manner.

In order to maximize your chances for trading success, you must take the time to create a solid, written trading plan that reflects your goals and fits your particular personality traits. No two trading plans will be exactly alike, because no two people are exactly alike. You have to take the time to honestly and objectively assess your personality traits and come to some sober conclusions about what type of risk tolerance level you actually have. This one factor has been the death of many traders in the markets–they never take the time to find out if they are even comfortable with the amount of risk and leverage they’re utilizing in their positions. Most professional traders will tell you that they rarely risk more than 5% of their entire capital on one particular trading idea. For more conservative traders, even 5% is too much–they usually won’t risk any more than 1 or 2 percent of their entire capital on any one trade. This leaves a comfortable amount of room for errors and losing trades, which will inevitably happen. Only a fool “bets the farm” on any one trade.

One of the most important steps you can take in order to develop a solid trading plan is to assess your own skill level. Are you truly ready to trade, or are you just excited about trading? Have you taken the time to see whether or not your system works by way of paper trading (a.k.a. “practice trading”) first? Many online Forex and futures brokers now offer account features that include “virtual trading” or “practice” accounts, which are basically like a “flight simulator” for trading. You can use these types of features to get familiar with the process of placing trades, utilizing different order types, and testing various trading strategies before putting any actual money on the line.

During this time of practice trading, you can work on developing a solid trading methodology that includes determining proper entry and exit signals, position durations, profit targets, and what amount of capital you will put at risk for each trade. After you have practiced a while, you can take the time to honestly assess whether or not you can trust the system that you have put in place. Can you move on your trading signals without any hesitation? Can you cut your losses and let your winners run? Are you confident that your plan will work in light of the rigorous volatility of the Forex or futures markets? You must be comfortable with your own answers to these questions if you are going to develop a sensible and realistic trading plan.

Another factor that can have more of an impact on our trading than we would readily like to admit is our state of mind. If you are frustrated, exhausted, distracted, preoccupied, angry, depressed, or any other sub-optimal emotional or physical state, you will more often than not sabotage your own trading performance. Trading is an extremely demanding mental and psychological exercise, and if you’re not fully prepared (both physically and mentally) to do battle in the markets, you would be better off sitting on the sidelines for a while. You may need to develop some type of preparation routine or “pre-game ritual”, such as taking time to meditate, repeating a certain mantra, etc., in order to gear yourself up for the trading day.

Position sizing as well as entry and exit points should be determined before you put on the trade. Have you set acceptable profit targets based on known levels of support and resistance? Have you established your “bail out point” where you will throw in the towel on a trade if it simply doesn’t go your way? You should be well aware of what you’re going to do ahead of time whether the markets move in your favor or against you, and all of it should be in writing before you submit any order. Best-case and worst-case scenarios should be worked out ahead of time, and contingencies should be in place before initiating a trade. When you are actively engaged in trading, your plan should be set in stone, but as soon as the markets close, you should take the time to re-evaluate your strategies. Let the trade itself, whether it was a winner or a loser, provide you with feedback in order to refine and sharpen your trading strategy. If things went wrong, what could you have done better? If things went well, what did you do that you could possibly duplicate in future trades?

In summary, treating your trading as a business will help you avoid the temptation to “wing it” and fly by the seat of your pants in your trading venture. By utilizing a disciplined, well-thought-out trading plan, you set yourself up for maximum success and long-term survival in these ever-changing markets.

image by: Jamie Welsh