From the January 01, 2011 issue of Futures Magazine • Subscribe!

Top 10 trading mistakes

imageAchieving success in futures trading requires avoiding numerous pitfalls as much, or more, than it does seeking out and executing winning trades. In fact, most professional traders will tell you that it’s not any specific trading methodologies that make traders successful, but instead it’s the overall rules to which those traders strictly adhere that keep them "in the game" long enough to achieve success.

Following are 10 of the more prevalent mistakes traders make in futures trading, in no particular order of importance.

1 Failure to have a trading plan in place before a trade is executed:

A trader with no specific plan of action in place upon entry into a futures trade does not know, among other things, when or where he or she will exit the trade, or about how much money may be made or lost. Traders with no pre-determined trading plan are flying by the seat of their pants, and that’s usually a recipe for a "crash and burn." A mentor once gave me the following bit of wisdom: "Any fool can get into a trade, but it’s the real pros who know when to get out."

2 Inadequate trading assets or improper money management:

It does not take a fortune to trade futures markets with success. However, the higher volatility in futures markets in recent months has prompted the major futures exchanges to increase trading margin requirements. Traders with less than $5,000 in their trading accounts can and do trade futures successfully. The electronic E-mini futures contracts have become a favorite among traders with small and large accounts, as the margin requirements are much less than the full-sized futures contracts. Importantly, traders with $50,000 or more in their trading accounts can and do lose it all in a heartbeat. Part of trading success boils down to proper money management and not gunning for high-risk "home-run" trades that risk too much trading capital at one time.

3 Expectations that are too high, too soon:

Beginning futures traders that expect to quit their day job and make a good living trading futures in their first few years of trading are usually disappointed. You don’t become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor, and trading futures is no different. Futures trading is not the easy, get-rich-quick scheme that a few unsavory characters make it out to be (in fact, you can add to this list listening to folks who try and convince you that you can make a fortune overnight trading futures). Before dreaming of becoming a successful full-time trader, you should first work on becoming a successful part-time trader.

4 Failure to use protective stops:

Using protective stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade, should it turn out to be a loser. Protective stops are a good money-management tool, but are not perfect. Limit price moves in futures markets can blow right past protective stop orders. The recent higher price volatility in the commodity markets has made stop placement a trickier endeavor, but protective stops are a prudent money-management tool. Added volatility highlights the importance of using stops and should not be used as an excuse to avoid them. Slippage is a fact of life in trading and should be worked into the equation. Understand that you will not always get filled at your stop price on losing trades and plan accordingly. Remember that there are no perfect money-management tools in futures trading.

5 Lack of patience and discipline:

While highlighting these virtues has become cliché, when determining what unsuccessful traders lack, not many will argue with their merits. One classic example of trader discipline in trading markets lies with the rally of the U.S. stock index futures that occurred early last autumn. Veteran traders know that the months of September and October are historically bearish for the stock indexes. However, the stock indexes last fall powered right through those historically bearish months and set fresh for-the-move highs on a regular basis during that period. A trend trader exhibiting the discipline to continue trading with the trend and the patience to let the market tell him or her when that up-trend had ended, would have booked sizable profits during a period of several weeks. Other, less disciplined traders may have just bet on the hunch that markets were headed lower in September and October, without making the market show them technical evidence of such. Also, don’t trade just for the sake of trading or just because you haven’t traded for a while. Let those very good trading set-ups come to you, and then act upon them in a prudent way. The market will do what the market wants to do — and nobody can force the market’s hand.

6 Trading against the trend — or trying to pick tops and bottoms:

It’s human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Unfortunately, that’s not at all a proven means of making profits in futures trading. Top and bottom-pickers usually are trading against the trend, which is a major mistake. The 2010 rally in the precious metals markets, in which gold futures hit an all-time high and silver futures notched a 30-year high are prime example of markets that continued to show solid up-trending price moves despite moving into the stratosphere. Would-be top pickers in the precious metals markets were brutalized in 2010.

7 Riding losing positions too long:

Most successful traders will not sit on a losing position very long. They’ll set a tight protective stop, and if it’s hit they’ll take their losses (usually minimal) and then move on to the next potential set-up. Traders who sit on a losing trade, hoping that the market will soon turn around in their favor, are usually doomed. You can make adding to a loser 7B. There is a tendency to want to price average down on losing long positions (or up on losing shorts) because if you like, say, corn at $3.50, you’ll love it at $3.25. This is often a bad idea and always dangerous.

8 Over-trading:

Trading too many markets at one time is a mistake, especially if you are racking up losses. If trading losses are piling up, it’s time to cut back, even though there is the temptation to make more trades to recover the recently lost trading assets. It takes keen focus and concentration to be a successful futures trader. Having too many irons in the fire at one time is a mistake.

9 Failure to accept complete responsibility for your own actions:

When you have a losing trade or are in a losing streak, don’t blame your broker or someone else. You are the one who is responsible for your own success or failure in trading. You make the trading decisions. If you feel you are not in firm control of your own trading, then why do you feel that way? You should make immediate changes that put you in firm control of your own trading destiny.

10 Not getting a bigger-picture perspective on a market — both technically and fundamentally:

You can look at a daily bar chart and get a shorter-term perspective on a market trend. But a look at the longer-term weekly or monthly chart for that same market can reveal a completely different perspective. It is prudent to examine longer-term charts, for that bigger-picture perspective, when contemplating a trade. From a fundamental perspective, also make sure you have a bigger-picture view of what’s occurring in the market you are following. The recent sovereign debt uncertainty surrounding the smaller countries in the European Union (EU) roiled the currency and other markets for much of 2010. Currency and financial market traders needed to keep a closer eye on the news events and upcoming events revolving around the EU debt crisis. Not knowing or following key fundamental events in a market can blindside a trader.

Jim Wyckoff is the proprietor of the analytical, educational and trading advisory service, "Jim Wyckoff on the Markets." He has a website at and his email address is

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