The superior liquidity and varied financial and commodity based products available make futures trading an extremely attractive proposition for investors. However, there are a few common mistakes that tend to wipe away their profits over a period of time. These pitfalls can be avoided with a little caution right from the beginning. In fact, most seasoned traders will always suggest that it is more about avoiding mistakes rather than smart strategies that help making substantial profits in futures trading. A clear understanding of the pitfalls and means to avoid them will help you a foothold in this extremely interesting investment avenue.
This is by far the most common of all mistakes that new traders make while entering the futures market. Without any definite plan guiding their investments, new traders often land up in grief. The exit timing in futures is far more important than the entry, and that is why experienced people always have a plan of the kind of profits that they are looking at and to plan their moves accordingly. Andy Daniels, founder of Daniel Trading, strongly believes the following:
In order to participate in the futures markets, commitments must be made in two specific areas, capital and time. These vary from trader to trader depending on available risk capital and chosen trading style.
Lure of Quick Gains
Like any other profession, trading also requires dedicated practice before a novice turns veteran. So if you are looking to make big gains right at the outset then be prepared for some shocks. Especially if you are planning to quit your job and take up futures as a whole time profession to start with, then there is a definite need to rethink your plans. Any beginner will need ample time to get used to the nuances of futures trading before being able to confidently make profits regularly. Impossible expectations often lead to incorrect decisions causing losses to beginners. Senior trader Mike Seery believes that,
Identifying where stops exist in the market is an important lesson to learn because placing a correct stop loss that will improve your trading tremendously over the course of time.
Futures are a highly volatile arena. In order to be able to sustain oneself in this unforgiving field, you will have to inculcate discipline and the requisite patience. Though this aspect has been often overstated, it still holds much relevance. There are likely to be unpredicted rallies tempting you to jump on the band wagon. But, unless you are able to categorically pin point the exact causes, it will be unwise to put in your money in such situations. Experienced traders always refer to earlier trends as a guideline for future investments. There will be sudden distressing situations, and a novice is likely to be tempted to sell off in losses. It is in such circumstances that your understanding of fundamentals will help hold on to your nerves and wait till you can make profits or minimize losses. Trader mentor and author Gabe Velazquez says that,
For those that don’t have discipline, or a viable low-risk strategy, trading in a volatile market can be disastrous.
Trading Against Trends
In an effort to catch the Tops and Bottoms, often new traders try trading against the trends which is a dangerous move to start out with. It is virtually impossible to pick the Tops and Bottoms every time. So in such an eventuality the likelihood of major losses is also quite high. There have been several instances in exchanges across the world where such moves have been severely punished by the markets leading to complete devastation for these kind of traders.
Unwilling to Take Some Losses
This is a rather peculiar situation when inexperienced traders tend to sit on a losing position for too long with hopes to come out unscathed. This is a fallacy and as a beginner you can avoid it. In fact even the most experienced traders often take minor losses and exit while there still time. Stubbornness has no place in futures trading. In this particular type of trading attempting to even out losses can be quite tricky.
Trading Multiple Markets Simultaneously
This is also known as over trading and is a major reason for beginners to fail at futures trading. In case you are making losses at any point of time, it is sensible to cut down on trading and think back to take stock of the situation. Attempting to make good from losses in one market through aggressive trading on another is a sure recipe for disaster. Critical situations demand focused decisions, which will not be possible if your attention is spread to too many avenues. Therefore, over trading is certainly not a very smart idea for beginners in futures. Slow and cautious moves are ideal for those looking to start a career in futures.
It is essential that any beginner gets a holistic view of the markets in terms of fundamental as well as technical analysis. While short term bar charts may present a very lucrative situation, a monthly analysis may indicate a far gloomier picture for the same market at the same time. This is where experience counts the most. The seasoned traders do not get carried away by spurts, and rather, co relate with the overall situation of the market before investing futures trading.
The most important aspect for any beginner in futures is that you have to take responsibility for your actions. It is certainly no point trying to blame the broker or analyst for your failures. The sooner you are able to take responsibility for losses the faster you will graduate into a more accomplished futures trader. Additionally, when you start taking responsibility for your actions you also start analyzing the reasons behind them, which is essential for maturing as a trader in futures. The bottom line is that while futures trading offers a huge potential for earnings, there are certain pitfalls which need to be avoided to ensure that you do not get in completely disastrous situations.