Discount Futures Trading – 7 Common Mistakes to Avoid
Discount futures trading has encouraged vast numbers of people to enter the financial markets with high hopes of making their fortune. But the majority lose their money within a few months.
How can you avoid this fate? Forewarned is forearmed, so let’s examine briefly the main reasons so many people fail.
1. Lack of education. Most people simply don’t know enough about the futures market. This applies especially to the foreign exchange (Forex) market. They’ve read a sales letter or web page that emphasises the quick profits and easy money that can be made, convince themselves that this is what they’ve been looking for and that soon they’ll be rich. So they dive in, impatient to make those easy profits, and then more often than not they are quickly disillusioned – and broke.
This is a shame, because most of these traders then abandon the idea of ever making any money in the financial markets. If they had invested just a little in some basic education they would have saved themselves a lot more money in the longer term, and would be far better placed to make large profits.
2. Getting snared by a phoney. A lot of people buy a book or course from someone who purports to be an expert but who doesn’t actually do any trading himself. The internet is full of such people. Always ask the person selling you the information how much he made himself using his methods over the last month. If he is genuine he won’t mind in the least telling you.
3. Jumping in head first. Never jump into futures trading without having run a successful demo account first. Nearly every online broker has demo account facilities where you can trade with “fantasy money”, so if you lose it all it doesn’t matter. The important thing is to learn from any mistakes you make. Treat the money as if it were real. If you trade recklessly on the grounds that it isn’t real money so it doesn’t matter, then you won’t learn. Aim to make a steady profit with your trades so as to increase your confidence when you come to trade with real money.
4. Taking too much risk. Only use capital you can afford to lose. Only risk up to 5 per cent of your capital on any one trade. You will have losing trades, sometimes several in a row. Make sure you can withstand such a run. When you have a losing trade don’t try to recover the loss with your next trade by increasing your risk. Just stick to your risk policy and you’ll recover. Don’t place all your trades in just one or two markets. Diversify your investments.
5. Not having a trading system. You should know when to enter a trade and when to leave it. Never trade for the sake of trading. Always have a stop loss (unless the type of trade doesn’t call for one, e.g. covered warrants), and with foreign exchange and other volatile markets you should always use limit orders, so you exit the trade as soon as you’ve reached your target. Otherwise greed can take over and you can lose all your gains.
6. Becoming greedy or complacent. Futures trading is high risk. The market is ruled by greed and fear. Better to make a small profit whilst managing your risk well than to make a large profit whilst having put too much of your capital at risk, because if you do this once too often you may get wiped out. Never try to buy at the bottom and sell at the top. Not even the experts do that. Aim to make a steady profit month by month or year by year.
7. Skipping on research. Whether you follow technical analysis or fundamentals, or a combination of both, make sure you have thoroughly
investigated the market you are trading and that you can articulate the reasons why you believe the market will move up or down.
Philip Gegan
