Part 1: Avoiding The Common Pitfalls Of A Futures Trader
By Ultimate Trading
How a futures trader can Maximize their Profits
Most markets have predictable trends and repeated patterns. Why? Because
most things that happen in the markets are a results of the motivations
of the futures traders in those markets.
Many people say that what drives most markets are greed and fear. Greed
makes people buy, and fear makes them sell. Greed and fear can actually
benefit a futures trader: Greed, or at least the desire to make money,
is why we trade in the first place. Fear is a healthy response when we
sense danger or disaster closing in, and it motivates us to get out of
a bad situation.
But when they get out of control, greed and fear are two of the basic
psychological pitfalls that can make a futures trader fail. A Futures
trader who consistently makes mistakes usually do so for a couple of reasons.
Excessive Greed and the Futures Trader
The desire to make money is what motivates one to become a successful
futures trader in the first place. But the desire to succeed is different
from trying to get every possible profit from a trade. This kind of reckless
greed makes a futures trader hold on to their positions long after the
downside has started to outweigh the upside and risk outweighs potential
Here's an example: a futures trader sees that a particular stock is starting
on a run; it's reported good news and is already up 20% for the day; the
volume is still building; it's stable at the current price; the market
is rallying strongly; and it looks like it will go higher. The futures
trader buys 1,000 shares at $6 a share. By 12:15 P.M., the stock has raced
up to $10 a gain of over 66 percent for the day, and a profit of $4,000
on 1,000 shares.
The futures trader knows that round number price points, like 10, are
psychological barriers for a futures trader, and that if a stock is going
to stop rising, it will probably be near a point like this. As it turns
out, after momentarily shooting to $10.03, the price stops rising and
starts to go down. The futures trader knows that he should sell now and
re-buy later, but he keeps thinking, What if it goes to 12 before it
stops? What if it makes a 100% gain? How will I ever forgive myself for
missing out on another $2,000 profit because I sold too soon?
So, of course what ends up happening is that the futures trader finds
that his stock has dropped down to $9.50 and then $8.75, ending the day
at $8.90. The next day the market opens down and the futures trader is
lucky to get out at $8.70, down $1,300 from the profit he could have had.
The way to get around the lure of excessive greed is to take profits consistently.
It doesn't matter if the stock goes up another dollar or two after you're
out of the position. The important thing is that you've made a clean profit
and are ready to go on to the next trade with even more capital than you
had before. And going on to the next trade is better than staying in the
old one once it's gotten too risky, because the next trade will have an
upside that outweighs the downside. (If it didn't, you wouldn't have any
reason to get into the position in the first place.) The old trade's downside
has begun to outweigh any further gains you're likely to make.
What should you do?
- Lock in profits. You may miss a few highs, but youll stay consistently ahead.
- Set your goals for solid gains, not the maximum possible gains.
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