7 Mistakes to Avoid When Trading Futures

Everyone makes mistakes; after all, theyre how we learn. Ask any experienced futures trader about what common mistakes that they make and youre apt to receive similar answers. Identifying those areas where mistakes happen is key to correcting them and becoming a more effective trader. Here are seven of the most common mistakes that futures traders make, as well as tips on how to avoid them.

1. Jumping in without a plan

If you think this may not seem like it should be high on any experienced traders list of identifying mistakes, think again. Mistakes can be made before any transaction is performed or any position taken. Traders who want to correct mistakes need to understand what they are currently doing so they can determine if a change is warranted, and the rst place to look is in trade preparation. Once a trade is selected, you need to have a plan for implementing, monitoring, and ending that trade. This starts with devising a specic plan for each and every trade. This requires that you know that market. Learn as much as you can before you even think about putting a trade on. Know the typical daily price range, what open interest is doing, what the trends are, and what and when any possible reports may be issued. Know your own risk Mistake tolerance to be sure it ts. Set realistic goals, risk and reward points, and think through the trade. Does the trade still make sense? Are you comfortable with the risk/reward ratio? If the answer to these questions is yes, then go ahead and do the trade.

All that sounds simple, doesnt it? Many experienced traders believe they are already doing itbut are they really? Its far too easy for even a seasoned trader to get caught up in the action, to get bitten by the bug to be in on a market that is making headlines. This is where even seasoned veterans can get into trouble. But even worse than diving in haphazardly is not sticking to your predetermined plan. Be sure to plan the beginning, middle, and end of each trade and take a step towards good trading habits.

2. Always using a market order

Entering into a fresh position sometimes requires a little panache. An area where mistakes frequently happen is when nding an appropriate order style for entry into a position. Even the best trade is no good if youre not in it, so its crucial to evaluate your method of entry. Market orders may be useful, as they basically guarantee a ll which is sometimes a very good thing. Creative order writing is worth exploring, and is a valuable tool that traders often overlook. Think of a quiver of arrows: Why use only one or two when you have some special arrows that can be handy and valuable when hunting for prot? Mistake Getting in at the right level can be as easy as entering a position using a precise limit. While limit orders may not always get lled, they do have the benet of getting you in at your determined price. Also, using stop orders to inaugurate a position has risen in popularity. For traders who depend heavily on technical analysis to provide them with support and resistance levels, stop orders can allow them to take advantage of momentum shifts as a price blows through an area housing protective stops. They work just as a protective stop might, and become a market order once

triggered. Stop limits are another. By using a stop limit order to enter into a trade you have the advantage of the potential drive, as well as a safety net in that your order cant be lled worse than the limit attached. Most all traders nowadays evaluate the market by analyzing similar statistics. Technical analysts rely heavily on using charts and mathematical tools to identify patterns that can suggest future activity. Pay close attention to major chart points and be alert to those points as clear spots for stops to be located. You may nd it advantageous to tweak your own placement of protective stop orders away from the crowd.

3. Getting married to a position

It is never a good idea to get married to a position the divorce can get ugly and be expensive. Just as trading a market exclusively from one side is a bad idea, so too is getting emotionally set in a particular position. Being emotional about any position is a mistake. Yet, all traders fall in love with positions from time to time. Its only natural ask any professional trader. If youre lucky, they may even tell you their story. You probably have a story or two yourself. Remember these stories today, and try your hardest to stay unmarried to your positions. How can traders avoid this mistake? Consider again the plan you prepared and should be following, because it will Mistake help keep emotion out of your trades. If you have a risk point that youre using, use it. Most traders have been knocked out of positions, stopped out and then lled right at the very low, only to have the market turn and run in favor of the original position. Such experiences hurt and lay poor groundwork for subsequent trades. That means not sticking to the plan, and thats a mistake. Markets are vicious: they take no prisoners. Guard yourself by sticking to your prepared game plan, and youll be set.

4. Bad timing
Traders often make mistakes in the timing of their trades. This reverts back to knowing the market you trade. Most markets experience heavier volume during certain times for example, coffee is busy at 8:30AM Eastern time. If youre trading coffee, you might want to consider how that time could provide an opportunity youre not currently addressing. Ignoring it is a mistake. Timing might be using the open or close to execute orders. There are a lot of day traders in certain markets, and the order ow from those day traders may be able to inuence prices when theres a rush to cover positions before the close. Be mindful of trading prior to a months end, or the end of a quarter. There are some traders who for years traded cotton spreads, knowing that the Goldman fund roll began on the fth business day of the month. There are traders who actively predict market ebbs and ows to occur within certain time frames and use that knowledge to their advantage. The timing of trades is a science. Whether theyre sophisticated or simple, if youre not considering the timing in the market you trade youre making a mistake. Mistake

Most every trader uses a computer to help them. There are even computerized trading programs, including algorithms that trade automatically. These programs are increasing their sphere of inuence in every market, especially during quiet times. Be alert to this, and know that some algorithms perform by hunting for weakness.

5. Ignoring option contracts

If investing has a proverbial tool box, then options might be akin to pneumatic drills. Using options may serve to enhance your trading plan by allowing you to do things you cannot do with futures. Options may provide a knowledgeable trader with exibility, cleverness, and the ability to try and take advantage of shifts in volatility as well as price. Option contracts can be bought and sold, just like futures contracts, but they have unique properties that make them attractive in some situations. Trading plans with options cover not only bullish and bearish Mistake market bias, but also potential prots in at or sideways markets. While they dont necessarily move at the same rate as futures, options can still be employed by some investors in risk management scenarios. Options on futures contracts make an appearance in hedging strategies as well, for futures markets and as hedges against other portfolio contents.

6. Not getting the best bang for your buck.

Trading futures is applying leverage, and trading options on futures can amplify this leverage. Not trying to make the most of that can be a mistake. The markets always offer potential. Unfortunately, the leverage also has a risk of loss that goes beyond your initial investment. When you are planning your trades, take a serious look at the initial costs or margins associated with holding the position. Is it worth it? Some futures trades could tie up thousands of dollars worth of margin while exposing you to unlimited risk without offering the potential for an equally rewarding return. Some options strategies can be Mistake a fools errand as well. Why risk $1,000 in premium and transaction fees if the potential prot is only a few hundred dollars more than your initial outlay? Carefully review the risk to reward ratio of any trade you are considering - there might be better bang for your buck out there among other trading opportunities.

7. Not having a disaster plan

Trading in futures and options are risky enough, but every once in a while a disaster comes along that can leave traders heads spinning. When that happens, its possible that even the best-laid trading plan can be ruined. In those cases, its important that you always have a disaster plan in place, an idea of how you will react in the extreme and volatile times that follow. No one knows when another Black Swan event will arrive. Have an emergency fund, be aware of your exposure, and keep proper records. The best mistakes are the ones we never forget. They are the mistakes that educate us to the bone. They Mistake can transform us and can lead us to epiphanies. There is no holy grail. Fortunately, youre blessed with the vast opportunities as a trader today because of all the tools in your traders chest. So learn how to use them. Prepare, research, and craft a specic trading plan. Study the markets you are planning to trade and never stop studying them. Evolve with the markets and learn their individual timing. Utilize option contracts and aim to make sensible, benecial trades. Adapt and learn how to prepare for the worst but plan for the best, and never stop learning from your mistakes.

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