The Single MOST IMPORTANT Aspect of Futures Trading
Okay,
traders: Do you know what is the most important aspect of successful
futures trading? Is it identifying the trading opportunity? Is it proper
entry into the market? Is it the trading "tools" you are using? Is it
an exit strategy that is the most important aspect of trading? The
answer is: None of the above (although an exit strategy is close).
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The most
important factor in successful futures trading is money management. One
still has to be savvy at chart forecasting and-or fundamental analysis,
but it's the money-management factor that will make or break a futures
trader. The huge leverage involved with trading futures absolutely
requires pinpoint money managing.
Over
the years, I have listened to the best traders in the business talk
about what makes them succeed in this challenging arena, and nearly
every one emphasizes the importance of sound money management. A few
years ago I attended a TAG (Technical Analysis Group) trader's
conference in Las Vegas. One of the featured speakers stressed that
becoming a successful futures trader should be more an act of survival
in the early going than scoring winning trades.
Surviving
in the futures market absolutely requires practicing sound money
management. Even a rookie trader who starts out with a hot hand will
eventually find that at least some trades are not going to go his way.
And if he has not employed good money- management principles on those
losing trades, he will likely have squandered his trading profits and
his entire trading account.
Conversely,
the novice trader who uses good, conservative money management
techniques will be able to withstand some losses and be able to trade
another day. The ability to take a loss and trade another day is the key
to survival--and ultimate success-- in the futures trading arena.
Here's
an important point to consider, regarding money management and
successful futures trading: Most successful futures traders will tell
you that during the span of a year they have more losing trades than
winning trades. Then why are they successful? It is because of good
money management. Successful traders set tight stops to get out of
losing positions quickly; and they let the winners ride out the trend.
On the balance sheet, a few bigger winning trades will more than offset
the more numerous smaller losers. Good money management allows for that
to happen.
"Good money management" is
a relative principle. A good money- management practice for one trader
might not be a good money- management practice for another. Here's a
real-life example: I had a fellow email me a while back, saying he was
up $3,000 in a sugar trade, and that his total trading account was
$4,000. Although I don't provide specific trading advice to individuals,
I told the trader that if I had only a $4,000 trading account and had
racked up 3 grand in profits on one trade, I would seriously think about
ringing the cash register on that trade and building up my account so
that I could withstand those drawdowns and losers that will eventually
occur.
On the other hand, if a trader
with a $30,000 account had a $3,000 winning sugar trade, he may want to
let the winner ride a little longer, as pocketing the profit would not
nearly double his trading account, as it would the smaller-capitalized
trader.
In other words, don't be a
greedy trader. There's an old trading adage that says there is room for
bulls and bears in the marketplace, but pigs get slaughtered.
Let
me emphasize here there is nothing wrong with starting out with, or
keeping, a smaller-capitalized futures trading account. But I strongly
suggest that those smaller accounts use the very strictest of money
management.
There are dozens of good
futures and stock trading books available, and most spend at least an
entire chapter on money management.
Here are just a few very general money-management guidelines:
.
For smaller-capitalized traders, don't commit more than one-third of
your trading capital to one trade. For medium- and larger-capitalized
traders, you should not commit more than 10% of your capital to one
trade. The guideline here is, the larger your trading account, the
smaller your commitment should be to one trade. In fact, some trading
veterans suggest larger trading accounts should not commit more than
3-5% of their capital to one trade. Smaller-capitalized traders, by
necessity, have to commit a larger percentage of their capital to one
trade. However, these small-cap traders may want to trade options
(buying them, not selling them), as risk is limited to the price paid
for the option. Or, smaller-capitalized traders may want to trade on the
Mid-American Exchange, a division of the Chicago Board of Trade that
has smaller futures contract sizes.
. Use tight protective stops in all your trades. Cut your losses short and let the winners ride the trend.
. Never, never, never add to a losing position.
.
Your risk-reward ratio in a futures trade should be at least three to
one. In other words, if your risk of loss is $1,000, your profit
potential should be at least $3,000. I can't stress enough that survival
in the futures trading arena (especially for beginners) should be your
top priority.
About the Author
Jim Wyckoff has been involved
with the stock, financial and futures markets for more than 20 years.
He was born and raised in Iowa, where he still resides.
Wyckoff became a financial journalist
with Futures World News for many years, cutting his teeth as a reporter
on the futures trading floors in Chicago and New York, where he covered
every futures market traded in the United States at one time or another.
Not long after he began his career in
financial journalism, he began studying technical analysis. By studying
chart patterns and other technical indicators, he realized this approach
to analyzing and trading markets could level the playing field between
“professional insiders” in the markets and individual traders.
His extensive studies of technical
analysis and knowledge of markets led to several positions, including
chief technical analyst at several well-known companies. He says his
mission is not just to generate profits for traders but to also provide
them with educational and insightful information because, in the
fascinating business of trading, one never stops learning.
Wyckoff received a Bachelor of Science
degree at Iowa State University, graduating in 1984 with a major in
journalism and a minor in economics. He and his wife have two children, a
son in high school and a daughter in college.
When he’s not analyzing markets and
educating traders, Wyckoff says he loves adventures, from driving a Jeep
across the highest mountain pass in the continental United States to
extreme winter camping in the Boundary Waters to hiking in the jungles
of South America.
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