The Most Important Aspect For Futures Trading

Futures Trading

When it comes to successful trading, do traders know what the most important aspect of it is?  Is it identifying a good trading opportunity?  Does it involve having the right entry into the market?  Or is it having the right trading tools?  Is the most important aspect for futures trading having a good exit strategy?  The answer is, of course, none of the above (however, having a good exit strategy is close).

When it comes to successful futures trading, the most important factor is money management.  You still need to be savvy with fundamental analysis or chart forecasting, but what truly makes or breaks a futures trader is money management.  Pinpoint money managing is required to handle the huge amount of leverage that comes with trading futures.  

I have listened over the years to some of the industry’s best traders discuss what makes them so successful in this challenginFutures Tradingg area, and practically everyone emphasizes how important the concept of sound money management is.  A couple of years ago I was in Las Vegas attending a Technical Analysis Group conference.  A featured speaker there stressed how during the early going developing into a successful futures trader was more about surviving than it was scoring winning trades.

Being able to survive within the futures market definitely requires a trader to practice sound money management.  Even a beginning trader starting out with a hot hand eventually is going to discover that some trades at least will not go his way.  And if good money management practices are not employed on the losing trades, most likely he will have not only have squandered away his profits but also his whole trading account.

On the other hand, the new trader who utilizes sound, conservative money management practices can withstand some losses and still have the ability to make more trades.  In futures trading, the key to survival- as well as ultimately achieving success- is being able to absorb a loss and then live to trade another day.

Another important point that can be considered, when it comes to successful futures trading and money management: a majority of successful futures traders will state that over the course of a year they will end up having more losing trades than they do winning ones.  So why are they successful?  It’s due to good money management.  Tight stops are set by successful traders in order to quickly get out of their losing positions.  They allow their winner to ride the trend out.  A few larger winning trades on the overall balance sheet will often more than offset numerous smaller losses.  This is made possible by good money management.

However, good money management is of course a relative principle, and will vary from one trader to the next.  For example, a trader who has $3,000 on a sugar trade, and has $4,000 as his total trading account.  If someone has just a $4,000 total trading account with $3,000 in profits on a single trade, I would seriously consider just cashing out on the trade to build my account up so I would be able to withstand losers and draw downs that will take place eventually.

On the other hand, another trade having $3,000 on a winning sugar trade but with a $30,000 account might want to ride a winner a bit longer, since pocketing the profit wouldn’t almost double his total trading account the way it would for a smaller-capitalized trader.

So, don’t get greedy with your trades.  There is an old trading saying that states that in the marketplace there is room for bears and bulls, but pigs are slaughtered.

First of all, let me stress that there isn’t anything wrong with getting started with, or maintaining, a smaller futures trading account.  However, I do strongly suggest that anyone having a smaller account use very strict money management practices.  There are numerous good stock and futures trading books that are available, and a majority of them spend one chapter at least on money management.

The following are couple of general money management guidelines for you to follow:

If you are a small-capitalized trader, you should commit over one-third of your total trading capital on one trade.  For large- and medium-capitalized traders, don’t commit over 10% of your total capital on one trade.  The bigger that your trading account is, the smaller a commitment should be made on just one trade.  Some trading veterans recommend that no than 3 to 5% of capital from larger trading accounts should be committed to one trade.  By necessity, smaller-capitalized traders, need to commit a higher percentage of their total capital on one trade.  However, those small-cap traders might want to trade options (purchasing them and not selling them), since the risk is limited to the option’s purchase price.  A small-capitalized trader can also trade on the Mid-American Exchange, which is part of the Chicago Board of Trade with smaller sized futures contracts.

On all of your trades, make use of tight protective stops.  Allow your winners to ride a trend but cut losses short.

Don’t ever add on to a losing position.

On a futures trade, the risk-reward ratio should be three to one at least.  So the potential profit needs to be $3,000 at least, if there is a risk of losing $1,000.

Your top priority in futures trading, particularly for beginners, should be survival.