Part 2: Avoiding The Common Pitfalls Of A Futures Trader

Provided By Ultimate Trading Systems

The Excessive Ego Of The Futures Trader

Big egos cost thousands of people millions of dollars in the year 2000. An inability to admit a mistake causes many people to refuse to take small losses on a bad trade. Why does a futures trader resist taking small losses so they can move on to better trades? It's because they don't want to admit that their decision to get into a position was unwise. They don't want to admit that they were wrong about the stock, bond, commodity, or currency.

Here’s an example: A futures trader buys 500 shares of a stock at $20 per share, investing $10,000. He believes that the concept behind the company’s innovative new software is going to be the extremely successful, and he's seen a lot of reliable information that backs up this idea. The price has recently moved up steadily, from 16 to 20, so it seems the market shares his belief.

For some reason, though, the new concept is slow to catch on. The futures trader holds the stock for three weeks and sees its share price remain essentially the same as where he bought it. It goes up a dollar, down a dollar, and so on — it's trading in a range and doesn't show any signs of movement. Then the market trends downward and all the tech stocks go down. His stock doesn't fall quickly, but over the next couple of weeks it gradually sinks back to $16 a share. There's no sustained volume, and it seems that no one is interested in the stock.

The futures trader insists that if he just keeps holding the stock it will not only recover but bring him a large profit once the rest of the market realizes its value. The futures trader holds the stock for the next five months, watching it move up and down between 15 and 16. Finally, after more than six months, the stock goes on a run — up to 22. The futures trader does the right thing and takes profits at this level. Now he can have the last word with all his friends, who were sure he would never make money on the stock. He gets to say to everyone, "I told you this stock would be hot."

But it doesn’t matter. The reality is that the futures trader has tied up $10,000 for six months for a 10% profit, when he could have made at least that much every week or so by moving on to better trades. There was no compelling reason to think the stock would go up soon, and the futures trader had no exit plan.

What should a futures trader do to avoid this?

  • Take small losses.
  • Realize you don't need to win on every trade.
  • Don’t fall in love with the trades you make.

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