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Want to learn how the futures markets really work? Dan O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com), responds to your questions about today's futures markets. To submit a question, post your question to our website at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. |
Dan O'Neil |
DON'T BE A SORE LOSER
I've been trading futures for a while now, and I've followed all of the standard advice about doing my research and setting up a trading plan. However, I've found it difficult to sit by when the market starts to turn against my position. My instinct tells me to take emergency action and do whatever it takes to get right again, but most of the "experts" seem to agree that's a recipe for disaster. In general, what is the best way to handle a losing streak when you're right in the middle of it?
Welcome to the club. Every successful veteran trader has experienced an occasional run or two of poor performance in the futures markets; you can't expect to operate in these markets without a few valleys to go along with the peaks. In truth, plenty of traders wind up with more losing trades than winners. So how do they survive to trade another day? It's a simple, unglamorous answer -- by maximizing profits on their winning trades and minimizing losses on the losers.
Even so, you raise a great question here -- lofty strategy maxims and big-picture thinking aside, what's a trader to do when the losses start to pile up and the winners are few and far between? Just because you know there will be days like this doesn't mean they're easy to endure. Here are a few things to keep in mind when your trading goes sour:
- Scale it back. If you're
having trouble finding consistent success trading several markets, think
about cutting back to just one or two. This way, you can follow fewer trades
more closely and document your success and failures more accurately. Plus,
your trading account won't be drawn down so quickly.
- Dear diary. A good trading diary
can be invaluable in going back to see if there's a common thread among your
losers and winners. After all, it's tough to make adjustments if you don't
have a clear picture of what's happening.
- Cool it. If you're not trading many markets
and still racking up losers, it could be time to take a short break from
trading altogether. Some time off can give you a chance to gather your thoughts,
allow your confidence to recharge, and perhaps open your mind to other trading
methods and strategies. This can be especially good advice during periods
of extreme market turbulence or volatility. Sometimes standing on the sidelines
can be the best position in the world.
- Don't be seduced by the long ball.
It's one of the classic do not nuggets in futures trading. In the midst of
a losing streak, don't ever try to make a grand-slam trade to get back on
the plus side in a hurry. Though it sounds counterintuitive, you should try
to do just the opposite -- make smaller, lower-risk trades until things start
to turn around and you can resume your normal asset allowances for trades.
Successful, long-haul traders often survive the rough patches simply by digging
in and playing it conservative for a while.
- Don't lose your discipline. This is more
or less an extension of the point above. Are you following the trading plan
that you devised before you put on the trade? Do you have a viable exit strategy?
If the answer to either of these questions is no, you may have just discovered
one of the causes of your troubles. Rededicate yourself to always trading
according to a disciplined plan. You cannot fly by the seat of your pants
in the futures markets and expect long-term success.
- Be confident. Try to stay faithful to your
trading methods. This is a particularly difficult point to embrace when things
aren't playing out in your favor, but you developed your methodology for
a reason. If you come to realize that your methods really aren't successful,
set out to find something else. There's nothing wrong with changing course,
as long as you do so based on a calm, rational assessment of your long-term
trading success, as opposed to a knee-jerk reaction to a bad short-term run.
- Work harder. Like just about everything worthwhile in life, becoming a successful trader isn't easy, and you can't expect winning trades if you aren't working hard at trading. If you haven't paid at least some attention to market fundamentals, perhaps it's time to take a break from the charts and add that research aspect to your routine. Conversely, if you're trying to have consistent success while ignoring the trendlines and oscillators, you may be working with a handicap that could be overcome by just exerting some effort to learn some of the basics of technical analysis.
Originally published in the November 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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