The following article includes pertinent information that may cause you to reconsider what you thought you understood. The most important thing is to study with an open mind and be willing to revise your understanding if necessary.
This interesting article addresses some of the key issues regarding Futures trading. A careful reading of this material could make a big difference in how you think about futures markets and trading them.
How a strategic money management plan works is discipline, not magic. In the market place it’s possible to be right, and to still lose money. In fact, it’s pretty common. Traders who win on a high percentage of their trades often end up with their capital eroded away, and left with nothing to show for their work. They lose their gains because they don’t know how to manage their money.
Being a good manager of your own money is one of the most difficult of skills to learn. But if you do not use good money management to bank profits, learn to take small losses when you are wrong and control your use of margin, you will lose it all. No matter how good of a trader you think you are, your first priority needs to be protecting your capital if you want to be successful.
As a trader, your capital is the most valuable asset you have. It is your only asset in the eyes of the market. Without it, you can’t work at all. For this reason, bringing in no profits on a trade is better than losing any part of your margined account. If your account is intact, you are alive and live to trade another day. If your capital has suffered a loss your efforts for making gains will wasted playing catch-up. The more you’ve lost, the longer it will take to get back to where you started from, because now you have a smaller pile of capital to work from. A smaller capital base means smaller percentage returns on profits. Making 10% on a $5,000 account earns you $500, but if you’ve lost half of that account and have only $2,500 left, making 10% on your money will earn you only $250. You’d have to do that twice to make the same $500.
Sound money management has two main goals: to avoid losing money, and to avoid missing profit opportunities. The first goal is straightforward. You want to preserve your money and whatever profits you’ve accumulated. But you don’t just want to keep your capital and let it go stagnant. You want to trade with it, to continue to grow it and make your returns larger and larger. Not keeping your money tied up in bad or problem trades for long periods of time will allow you to not miss new profit opportunities when they come along. Failing to avoid either of these will cost you
It’s really a good idea to probe a little deeper into the subject of Futures. What you learn may give you the confidence you need to venture into new areas. Working to avoid losing those profit making opportunities isn’t quite as obvious a goal. With the second goal in mind let’s compare the outcomes of two money-management decisions. Trader X buys a futures position, expecting it to go up, and finds that it doesn’t. However, he’s certain it will go up eventually, and he’s incurred a small loss, so he decides to wait it out. He ends up holding the position for two months before finally selling it. Trader Y buys the same futures at the same time as Trader X, but once he sees that it isn’t going up, he sells it at a small loss. He buys another futures position and makes a 10% profit on it. His next trade loses 2%, but after that he makes 7 %, and then loses 1%, and then gains 25% on a series of trades. Because the account is growing and he makes gains on an ever larger base of capital each time, at the end of two months, his account has grown quite handsomely, even though Trader Y was WRONG 50% of the time.
Which money management decision turned out to be the best? While Trader Y made a nice profit, Trader X not only lost time but also never made his money back. Even if he had made his money back on that position, it’s hard to see how this was a good use of his operating funds over the course of two months.
Clearly the goal of not tying up your capital in bad trades has an important impact on your profits. Using sound money management will keep your trading funds and your profits safe. Though it is a difficult skill to learn, once you know how to practice good money management techniques, you can almost guarantee that you will be a successful trader.
If you’ve picked up some pointers about Futures that you can put into action, then by all means, do so.