Futures Trading Do’s and Don’ts

The futures market is fast and frenzied and one in which you can make considerable profits with a relatively small investment of capital. However, the flip side is also true; you can lose big and you can lose fast in this market. Remember it is a zero sum game, and the opposite side of your contract may be a professional trader who gets paid to be right.Here are some essential do’s and don’ts that apply to the futures market. They are based on the experiences of traders who have survived and thrived.

Futures Market Do’s

  • Do make sure you understand how the futures market works BEFORE you enter it, including the basic terms and especially the principle of leverage.
  • Do start your trading day with a plan and stick with the plan throughout the day. Doing so keeps you from making emotionally-based decisions.
  • Do define your entry points, exit points, and other objects early in the day. Later, if necessary, make only small adjustments.
  • Do select a system upon which you will base your trade decisions and stick with your system. The system should ensure that you make consistent profits in various market conditions.
  • Do use the tools and signals that are available such as charts to keep emotions and impulsiveness from interfering with your trade decisions.
  • Do make it a point to try and learn from your “bad” trades. You’ll learn more about trading by studying what went wrong than you will by studying what went right.
  • Do periodically reevaluate your personal financial situation to ensure you still have “risk money” to use in the futures market.
  • Do trade with rather against trends. The trend is your friend!
  • Do use stop loss orders! Determine the maximum amount you’re willing and financially able to lose and set stop orders beforehand. Your trading strategy should tell you how much you should risk for a given trade.

 

Futures Market Don’ts

  • Don’t participate in the futures market if you don’t have enough time to properly research and plan your trades, AND if you don’t have a source of money that you are willing (and able) to risk losing.
  • Don’t try to pick market tops or bottoms. Wait for the trend to confirm the direction.
  • Don’t base your trading position solely on a computerized trading program. Remember this important fact: All computer programs are written by humans. When you trust your decisions to software, you’re putting a lot of trust in someone you don’t even know.
  • Don’t listen to rumors. Taking actions based on rumors mostly results in making bad decisions.
  • Don’t trade for emotional or impulsive reasons. Trade decisions based on greed, fright, and anxiety are the fastest ways to wipe out your account.
  • Don’t fall into the trap of believing that you can “catch up” if you’re on a losing streak with a trade. Get out after 3 days of unfavorable results; don’t “ride out the loss” thinking the tables will turn.
  • Don’t give away all your profits if the market turns against you. Have a point where you take your remaining profit.
  • Don’t take small profits if the market is going your way. You’ll need to maximise your profits to make up for the times where you need to take a number of small losses.
  • Don’t contract with a broker until you are absolutely certain about all of the fees involved and all the rules that apply to your trading account.

So there you have it – Some basic do’s and don’ts to guide you through the futures market.