Any trading plan will have losing trades, and it's how you handle them and how well you do your main job of keeping your capital safe that will determine how well you do in the long run.
You have to expect losses, plan for them, welcome them, and grab them. Your first loss hurts less than the rest. Most importantly, don't let losses bother you. They are an important part of trading well.
To keep losses small and be successful, you must have a good money management philosophy and skills. Futures traders who are good at their jobs look at the odds and try to win on average more than they lose. Money management makes it less important to find the best way to do things.
A lot of money was lost.
If the value of your account goes down by 50% at any time, you should stop trading until you reevaluate your trading goals. Should you trade in futures? It is important to keep your losses to a minimum. Based on the loss of your original capital, the table below shows you the returns you will need to make. If you lose 50%, you need a 100% return just to get back to where you started.
Smart money management starts with making sure the trader has enough money to last through a few losing trades. The trader must also save enough money to be able to add to the rare, big, profitable move and keep adding to it.
- Discipline
Like most things in life, if you don't have discipline, you won't do well. Discipline means sticking to your trading plan, which includes your "stops" and "entry points." This is the hardest rule to follow, but it's also the most important. For futures traders to consistently make money, they need to have a lot of self-discipline and a clear trading strategy that helps them make the most of their profitable trades and make the least of their losing ones.
It's not hard to make a trading plan, but it's the discipline to stick to that plan that sets good traders apart from everyone else. When you're making money, it's easy to stick to your trading plan.
No matter how smart, rich, or sure of himself a speculator is, he or she will never be consistently successful without discipline. But when a trader is losing money, the same trading plan will seem rigid and limiting, and that's when he or she will be tempted to go off plan. You might want to go against your trading plan, but if you do, it will defeat the purpose of making it in the first place.
Don't forget that the plan was made to give you rules to follow. If you don't follow it, you will always be exposed to risks you weren't ready to take. One of the main reasons many traders use a system driven trading approach is that it is hard to keep the required level of discipline. These traders include professional hedge fund managers and Commodity Trading Advisers, who use computer models to decide what to buy and sell. This means that no trades are made based on intuition or gut feelings.
The equity, futures, and options markets are all unpredictable, which makes it natural for the people who take part in them to feel some anxiety. The ultimate success of a speculator depends on how quickly they can spot a losing trade, admit they made a mistake, and have the self-control to get out of the trade with a small loss rather than being stubborn and making a losing trade worse.
A trader who doesn't have discipline may:
- Make trades quickly without having enough information.
- Don't wait and trade on impulse.
- Invest in too many markets with too little money and information.
- Not utilise stops.
- Throw out their plan for trading.
- Give in to your feelings.
- Don't trust charts.
When you plan every trade from start to finish, you have to think about how far the market could move in your favour or against you. You can't control the markets, and most traders do a good job trying to control themselves. The only answer is a written trading plan. It's important to make your plan when you can think straight.
In Part 4, we'll...
