Teacher and consultant to the futures industry since 1983
Teacher and consultant to the
futures industry since 1983
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TRADING TIPS If the market moves against you....admit you were wrong and do the right thing... GET OUT!. - The number one reason for losses in the futures markets is the fact that traders let there losses run. We all have egos and want to be right. For this reason we will stay with a trade that we should abandon. Consider this: The best way to look at this situation is that you would be wrong if you didn't abandon the trade. Do the right thing and cut your losses. Let your profits run. This is of course the other half of the saying above. It too carries truth. So many traders will take any profit they can because they are so glad to have been right. For every trader there is a philosophy here, but I am a believer in "trailing stops". Once you have reached your objective in profits, consider the market strength. Of course you can't know when the market will reverse, but if the move appears persistent, don't just take profits, use a trailing stop to maximize them. Be patient, plan each trade. Never hurry into a trade or trade on hunches or hot tips. You should have a trading plan methodology, and to be successful, you must carefully plan each trade. No matter what commodity or "family" of futures contracts you follow there will almost always be a trade you can make according to your program. By following your initial program plan and avoiding "gut feel" or spur-of-the-moment decisions you increase your chances of profits. Don't look back. When the trade is done, don't look back to what could have been. After each trade allow yourself about 15 minutes to analyze it. In other words, if the trade was a winner, assess the data you had when you made the trade, and see if there was anything at that time that you may have overlooked that could have helped you maximize your profits on the trade. If the trade was a loser, ask yourself, if, based on the available data and research at the time, you would have still made the trade. If you can answer yes to that question, then you made a good trade even if it was a loser. Also determine if you correctly placed your stop order, and if there was any way you could have cut your loss even further. After you have reviewed the trade for "educational" purposes, then forget it. There is nothing you can do to change the results now, good or bad, and your attention and focus must now be used to prepare for the next trade.... move forward in your education and trading, not backward. Don't over commit. As a "conservative" commodity trader you should never commit more than 30 to 40 percent of your equity to margin requirement. If you are more aggressive then increase that amount from 40 to 60 percent. If you are a real aggressive "player", you may run that up to 80 percent. In any case, be sure to work the amount of your commitment into your trade plan equation. The more you commit to "initial" margin, the less staying power you have and the more severe the damage can be done to your portfolio with even small moves. Use stops. You will often be told not to use "stop loss" orders because "they" will hit your stop just to take you out of the market. Let's not be so foolish. Even if you are trading 10 or 20 contracts, you are generally a small trader in most of the futures markets. There are people trading that do hundreds of contracts at a time, why would "they" come after you? The reason it appears that you are being singled out is because the majority of new traders, and even many, many seasoned veterans don't have a clue about properly placing a stop. The full explanation of "stop loss" analysis would be impossible here, but if you email me with specific questions, or call, I would be happy to assist you. The placing of stops takes as much forethought as the preparation of the trade itself. Use them, but use them wisely! Believe me, when you are finally convinced that you don't need a stop, that will be the trade that could end your trading experience... it's not worth it! Take some profits home. When you make some profit, take home a percentage. If you started with $10,000 and are slowly increasing your equity through trading, then you may want to wait until you have a larger account so that you may more easily diversify and so that you have greater "staying" power. However, at some point you should begin withdrawing a percentage of your profits. If you can continue to make more on your winning trades than you lose on your losing trades, you should start to realize that you are achieving your goal of making money in the futures markets. You may choose to withdraw 30 to 60 percent of all the profits you make. Within a period of time you will have removed from the account the amount you started with, and will be "playing" with earned money instead of the risk money you started with. Psychologically this takes some pressure off and you may find you will become a more objective trader. The new attitude can be one of more confidence and can increase the fun of your trading. The earned money you withdrew should never be put back into the market. Diversify. This is easier to do if your equity is at least $10,000 but much better if it is $25,000 or more. It is also easier if you are using technical factors since the program you use to follow indicators is normally updated automatically when the closing prices are input, and you don't have to read hours of fundamental information for each commodity you follow. You should consider non-correlated markets. As an example you may wish to trade the financials and diversify in the grains or the meats. Keep in mind that trading somewhat correlated markets like the T-Bonds and the Foreign Currencies could cause all your trades to go bad since in a round-a-bout way the Financials and Foreign Currencies are both dependent on the movement of the U.S. Dollar. If you are in non-related markets, the results can often be better since if you lose in one position you may win in the other or others. Trend Trade. Use a portion of your trading equity to position trade. You may be interested in day-trading or trading quick volatile moves, since these are with out a doubt the most exciting trades. There is nothing wrong with this "excitement" trading, but factual data, surveys, and experience will prove that the most profitable trades over-all are position trades. Day-trading is notoriously dangerous. In fact if you choose to day-trade, most firms will ask you to sign an "aggressive trading letter". This letter is a full disclosure of the additional risks inherent in day-trading. So trade the fast trades, but commit at least part of your equity for those "seasonal" and trend position trades. Take a Break from Trading. If you should suffer a "losing streak", or just for as a stress reduction move... take a break from trading. This is an excellent time of year to take this advice. You should break more often than just once a year, but now is a great time. Around the holidays and into the first of the new year, much of the "big" money comes out of the futures markets. This huge reduction in liquidity can cause what I call "irrational volatility". You will see large spikes in the upward and downward direction for what seems to be no apparent reason. This irrational volatility can shred you portfolio like present wrappings on Christmas morn, and in just about as much time. Be real careful if you insist on trading futures this time of year, or be ready to hear me say "I told you so". Best of the holiday season to all, and may your trading make you very rich next year! Know your markets. Remember, all markets trade differently. Not only do things vary from the CEC to the CBT and other exchanges, but there are also variances within each market. Be sure to study the characteristics of the ones you intend to trade before you actually do trade them. Some markets will go into a "fast" condition more quickly than others. Some markets have "call" openings that can really affect your "Market On Open" orders. Some markets lose their liquidity more quickly than others. Still others are dominated by hedgers, portfolio managers, locals, etc. Don't just "pick" the futures contract to trade... study it before you do! Don't overstay your welcome. You've been in a position for a while, and it's getting down to one-to-two weeks before first notice day... be careful! This usually occurs when you are in a profitable position and you want to "milk" the move for all it's worth, or (and you should NEVER allow this to happen), your trade is losing and you have backed the position with margin money and you "hope" it will come back before the contract expires. The problem here is with the liquidity (open interest). As the contract draws closer to first notice day, the wise traders are exiting their positions and/or "rolling" them to the next active month. Suddenly you will see the open interest on the contract drop so low that when you do finally decide to offset your positions you are will be forced to take the price (or pay the price) demanded by the few players left in the contract. Learn to watch the open interest carefully to help you judge when to exit the contract you are trading and move on to a more liquid trade. Have a logical "Risk-to-Reward ratio. When you analyze a possible trade, be sure that you have a chance for a decent return, versus the risk you are about to take. First; determine the logical place for your stop-loss order. Calculate the amount of money you would lose (including commission and fees) if you were stopped out at that level. Second; consider your goal. From your planning of the trade, you should have a price target/goal in mind. Calculate the amount of money you would make if you reach this realistic price target (minus commission and fees). Now divide the possible profit money by the amount of the risk money. If you come up with a number less than 3, don't do the trade. Experienced traders will tell you that a reward-to-risk ration of 3-to-1 is acceptable, not on every trade though. Of course, the greater the ratio, the better, but anything less than 3:1 is not worth the risk. Evaluate the opinions of others. Your trades should be based on your plan and analysis, but, in the opinions of others you may find some information concerning your proposed trade that will affect your decision. I personally had five friends that were always anxious to discuss the trades I was considering. I would listen carefully and if there was no information that was new to me, I would take the trade, no matter what the opinions of the others were. I did have one little rule though... If all of my five friends were against the trade, I didn't do it... and if all of my friends agreed with the trade, I didn't take it either. Maybe it sounds crazy and maybe it is, but it seemed to work most of the time. Never add to a losing position. If the position you are in is a current loser, never believe that old saying; "if you liked it at the higher price, you gotta' love it at this price". The fact is that you were incorrect in your first assessment, what makes you believe that you will be right by adding positions? If you really believe you were right but just had the timing off a little, then stay with the current contract (unless you get stopped out by that carefully placed stop), but don't add to it until it begins moving in the direction. Build a Pyramid. Contrary to the tip above, try this... if you believe a sustained trend is about to happen in a certain futures contract, start with three positions (if you are capitalized enough, and can place a "tight" stop). If the move begins and it is in your direction, take two actions. First, move your stop order to protect yourself against any loss on the existing positions. Second, use the new equity that you have earned in your existing positions to add TWO more positions. If the trend continues in your direction, take two actions again. Move your stop to protect some of the high profits you now have, and add ONE more position. Your pyramid is now complete. By adding to your winning position in progressively smaller increments, you have kept your average price low, and even if the market retraces, you should not be damaged in any way. From this point forward, keep moving your stop from day-to-day to continually protect more and more profit. DO NOT add any more positions! A very important caution and warning... NEVER build an inverted pyramid. If you start with one position then add two then three, you are raising your average price and if the price moves against you, the possibility is very real that you will not only lose what you have invested, but more, and in some cases much much more. Do an example of both situations on paper and you will see the benefits of properly pyramiding. Be sure to trade on the short side. It seems that with the new trader, and even some not-so-new traders, there is some fear to "short" the market. Take a look at any chart, of any commodity and the likelihood is that you will notice when the price makes a correction in a bull market, or when it reverts to a bear market, the move down is usually faster than the up moves. This should alert you to the fact that there is a real trade opportunity there. As for the mechanics of shorting; it is no different than going long, except you "sell" the contract now with the intent of buying it back later at (hopefully) a lower price. If the price falls when you are long, you lose, and if the price rises when you are short you lose. The margin requirements are the same. Make sure you study your markets carefully, but if the signal is calling for a short position, don't be afraid of it. Stay away from "deep-out-of-the-money" options. The deep-out-of-the-money option is exactly like betting the 100 to 1 horse at the race track. These options will make you lots of money if the futures price does make a big move, and if you have predicted the right direction of the movement, and if you have the exact timing, Just too many "ifs" for me. Trading commodity futures or options isn't, or shouldn't be a game of trying to make the "big" hit. It is a job of trying to profit more than you lose. This takes work, and it is what a professional trader's goal is. A professional gamer taught me a big lesson with one statement. When I called him a gambler, he said; "I am not the gambler when it comes to horse races, you are. You bet $10 on every race and hope you hit on one or two. On the other hand, I bet $5,000 or $10,000 on one or two races that I have carefully handicapped. I am a professional gamer". Be a professional gamer when it comes to buying options. Analyze your trade carefully and buy the option that is at or near the money. This gives you a much better chance of leaving the "track" a winner. Don't be in the market ahead of a report. If you are not trading on the floor, and are not real "connected" with sources that influence the futures you trade, then don't be in a position when a report is due out. Traders think they have a 50/50 chance of making money when a report comes out, but I can show you that you only have a 12.5% chance. If you are long the commodity and the report is released, it would seem a 50% chance of winning. But what if the news is bullish, but not as bullish as people expected? That drops your change of making profit to 25%. Now add another possibility to the equation. What if the news was as bullish as traders expected, but it had already been discounted or worked into the price earlier... 12.5%! Make the trade. When your plan seems to have failed you a few times in a row, it's easy to get nervous about making the next trade. You have to know that it happens. There were times when I questioned my own trading methodology after losing five in a row. If you have re-evaluated your method and are still confident that it has merit, then you must take the next trade. If you don't, you might as well call it quits with respect to trading. If you haven't yet done the re-evaluation of what you use for your decision making, then that step comes before making the next trade. If you bought the option, watch the time premium. If you are buying call or put options, be very mindful of the time value. Time decay will occur throughout the life of the option, but take a look at what happens during the last two weeks. If the market has not moved in your direction, and if it is just sitting still, get out, and take your loss when there are two weeks left on the life of the option. Don't believe for a moment that if the commodity hasn't made a move for the past two months that it will make a miraculous and dynamic move in the last two weeks to put you into a profitable position. Instead, be a winner by selling the option with a couple of weeks left, and take a small loss versus the fact that if you wait, you will lose the entire premium. Before trading options, know all the strategies. You shouldn't be content to simply just buy the call or the put. There are many option strategies available for each different market condition. I will discuss a few over the next weeks, and let me know if you would like more details. Consider, but learn first, the bull or bear spread with options. They can be done with calls or puts, and if they are "vertical", (same expiration month, different strike prices) they have defined profit and loss potential. This allows you to know what you can make or lose on the trade if you just enter the position and leave it alone. In a "debit" spread, the most you can lose is the debit, while the most you can make is the difference between the strike prices less that difference. If you initiate a "credit" spread, the most you can make is the credit, and the most you can lose is the difference between the strike prices less the credit. Be sure to ADD the transaction fees (commissions and clearing) to the most you can lose, and SUBTRACT the costs from the most you can make. Don't get emotional. You must stick with your plan, and not get emotional about the trade. If you get "caught-up" in the trade you will have a tendency to become subjective rather than objective. This can be dangerous to your trading health since you will be tempted to stay with a losing trade or abandon a winner prematurely. Your plan has given you the signals to follow and to be successful you must adhere to your own rules. Stay away from predisposition. Many traders, are predisposed to always wanting to be long the contract. You must not try to impose your will on the markets. The markets go up and down and your will has no effect on them. You have to learn that you can make (or lose) money on both sides of the markets, and they don't always go up. Many beginning traders are afraid of the "short" side of the market, and therefore always want to be "long". This thinking can be hazardous to your trading health. Trust the plan you've chosen, and let it tell you what position to take. If you are buying or selling option straddles, don't do them wrong. Some traders are of the mistaken belief that you should buy an option straddle or strangle when the volatility of the futures contract is very high, and write the option straddle or strangle when the volatility is very low. Remember, just like futures prices themselves, volatility has it's own cycles. Just as the price of a commodity will cycle higher and lower, so goes the volatility of those commodities. If you are going to buy an option straddle or strangle, you should do so when the volatility is at or near a historic low, and you should sell when the volatility is at or near historic highs. When you've been profitable for a few trades in a row, don't get reckless. It is a fairly common experience. When you have had a few, or several profitable trades in a row you may become so convinced that you have the answers that you may start to over-trade your account, and begin deviating from your research and plan. You begin to feel that you can take more risks because you deserve the "big-money" (greed again). Stay with your plan, and if you keep winning, good for you, and you will have the pleasure of seeing your account continue to grow, DON'T THROW ALL THAT AWAY!! Know how to read your statement. I can't believe the number of traders that haven't a clue of how to read and understand their trade statements. Yes, they can be confusing and difficult, but it is important that you can account for each trade, profit, loss and expense. Get with your rep after market hours, and have them explain each item. Don't be surprised if even your rep has to get help, since we don't always have a clear understanding of all the codes and entries on the statements ourselves. Bottom line?.. work on it so you know where you stand. I'll bet you know how to read your phone or cellular bill (also not very easy), but certainly less critical than the information about your futures trading account. Greed is a known account killer. This goes along with a few other hints, but is so important to reiterate. If you "shoot" for the big hit, you will likely lose. Remember to stick to that plan and look for steady growth in your equity. If you are making a ten percent return per month, think, where else do you get a 120% return annually? It is the methodical trading that will keep you on track to profits if your plan is working. Very old saying... bulls and bears make money... pigs get slaughtered! Technician or Fundamentalist? There was a time when a trader could be purely technical or fundamental in their trading, but I believe those days are nearly gone. It seems that which ever you claim to be, you must keep a careful eye on the other. It is very important though, which ever you are to do your "homework" while planning your trade. Make sure that you research ALL possible avenues of your chosen technique. If you are a technical trader, gather information on all the systems you can, then develop your own, or use the one you find best. As a fundamental trader, be sure you are on every mailing list (USDA, Federal Reserve.. etc.) that has information that may affect the futures contracts you trade. Better informed means better trading. Why not try a "synthetic" long call position? When you buy a call you can't expect to receive a dollar-for-dollar profit that a futures position would return you if the price goes up. This is because even an in-the-money call option will not move exactly the same amount as the futures price. You sure would like to make that money, yet you are the type of trader that wants the defined risk that a long option position affords. Then give this a try... go long the futures contract and at the same time buy an at-the-money put option. Now see what happens... if the futures price goes up you will make every bit of the move, and if the price drops, you will lose all the way down on the futures position, but will gain all the way down on the long put. Therefore, you will have unlimited upside potential (minus the put premium and transaction costs), and your downside risk is limited to the cost of the put premium and the transaction costs for the put and the futures trade. How about the other side... the "synthetic" long put position? Repeating, only for the put... When you buy a put you can't expect to receive a dollar-for-dollar profit that a futures position would return you if the price goes down. This is because even an in-the-money put option will not move exactly the same amount as the futures price. You sure would like to make that money, yet you are the type of trader that wants the defined risk that a long option position affords. Then give this a try... go short the futures contract and at the same time buy an at-the-money call option. Now see what happens... if the futures price goes down you will make every bit of the move, and if the price rises, you will lose all the way up on the futures position, but will gain all the way up on the long call. Therefore, you will have unlimited profit potential (minus the call premium and transaction costs), and your downside risk is limited to the cost of the call premium and the transaction costs for the call and the futures trade. Don't jump in front of a fast moving train. Don't try to "pick" when a market is ready to turn around. Too many traders, novice and pros alike will try to make the decision when a trend has played itself out, and will continue to try to make money against the trend. The market is not going to turn from a trend up or down just because you want it to, or think that it should. Case in point... the movement in the stock market. I know several traders that have lost a lot of money because they thought the huge uptrend was done, and insisted on shorting the indices... over and over again. Let the market tell you when the trend has ended and then get on the right side. If the trend was a big one, then you will have plenty of time to enter on the other side for the correction or the change of overall direction. Listen carefully when you place your order. When you place your order with your representative or with the order desk, place it carefully and deliberately, then the most important thing... LISTEN even more carefully when the order is repeated back to you. Be sure you are not "hearing" what you want to hear, but instead hear what is being said. If you say buy when you mean sell or vice-versa, and the order is read back to you, you may often believe you heard correctly, until the order is filled and you realize you made a mistake that may cost you hundreds. Even if you gave the order correctly, if the clerk or broker wrote it down wrong, he or she will read it back the way they wrote it. If you don't catch the mistake... it is your mistake! If you make a mistake... get out AT ONCE! If your system tells you to short the market and you place the order as a buy (or vice-versa), correct your mistake the moment you realize what you have done. As a customer, your mistake may cost you more money if you wait to see if the market will "help" you get out of your mistake with a profit or less of a loss. After all, you should trade by your system. For a broker this situation is a lose/lose deal. If the position loses money, the broker must cover the mistake with their own money since they made the mistake... If the mistake becomes profitable, the profit belongs to the brokerage firm since the broker was essentially trading with "house" money. Sometimes in life ya' just can't win. Desperate money always loses! Another saying that really comes from truth and experience. When you or your customers are trading with your fingers crossed, the trade has become desperate. It seems to follow that when you are trading with very little equity, or your position is close to maintenance margin, or any situation that you know you should not be in occurs, the trade will never go your way. If you begin to feel stress because of the situation of your trade, you should no longer be in that trade, and you know it. Take your loss and look for a better opportunity. I promise you that you will feel better, and will be able to plan your next trade with more objectivity. Don't chase the market. Your system and research tells you there is a trade afoot. It tells you to enter at the current price. Whether you are going long or short, place your order and get in. All too often when a signal is given, the customer hesitates or tries to squeeze one more penny by placing a limit order at the price instead of just going in "at-the-market". Then what happens is you don't get the fill at your limit price and the price move a couple cents away from you. You still believe it is a good trade, and decide to change your limit price to get that fill. Then the price moves further away and you finally choose to get in on a "market" order (like you should have in the first place), but now you have chased the market and are filled at a price eight cents further away from when you initially wanted the position. You were afraid that on the market order you may have gotten "ripped" for a couple of cents, and in order not to let that happen you chased the price and got an even worse fill. Allow for no distractions. During the time you are planning your trade, and especially when you are making a trade, avoid all distractions. It is difficult enough to plan and to trade when you have full concentration, it can be impossible if there are distractions while you are doing it. I have seen (and experienced) bad trades when there are other things on ones mind while planning or trading. There is a time for all things, and remember, this is money we're talking about here. When doing your research and making that phone call to the order desk, keep focused or you can really damage your account equity. Get in touch with us by
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