Keys To Online Future Trading Money Management Part II - Small Losses & Margin

Provided By Ultimate Trading Systems

The Key To Making A Profit Online Future Trading

Without profits, online future trading is unsuccessful and without capital, there is no online future trading. These two keys work together to keep your capital intact. It’s important to maintain the your pool of capital, not only because you need it to enter a position, but also because if it is depleted, your ability to make profits is depleted as well.

Yet many involved in online future trading have trouble with an intrinsic part of protecting their capital. They don’t like to take small losses. They act this way even though it’s very likely that a loss that isn’t taken small will eventually become a large loss. Traders like these don't want to lose anything on a trade because it makes them feel like they’ve failed. But really, taking small losses means you have succeeded. Online future trading should focus on the fact there is small losses, not that there should be losses.

Taking small losses while online future trading is a way to limit losses when they occur and to make sure they never turn into big ones. Taking small losses and making big gains is the way successful traders trade. In fact, it's the only way to be successful at online future trading.

The best way to make sure you only take small losses online future trading is to use protective stops on every trade. Decide how much you're willing to lose on a trade before you enter the position, as part of your online future trading money management plan, and then set your stop right after you enter the position so you won't have a chance to second-guess yourself later in the trade.

If you think about how much you're willing to lose online future trading as part of your plan, it will also help you determine whether the trade is one you should make in the first place. Taking a good look at your downside will help to keep you away from questionable online future trading that could lead to large losses, though consistently placing protective stops will keep your losses small.

Another important way to guard against large losses while online future trading is to use margin carefully. What's the proper way to use margin? First, don't use all of it. Always leave yourself a generous cushion. Every change in the price of a stock in your portfolio changes the value of the collateral you have available for your margin loan. If the value of your holdings does go down, it will decrease faster if you are using margin than if you aren't using margin. This means that the size of your margin cushion will decrease at the same increased rate.

I recommend that you never use more than two-thirds of your total margin capacity, leaving the other third as a cushion while online future trading. If declining values bring your cushion to below one-third of your capacity, it is time to sell some positions. Also, when you are deciding how great a loss you can tolerate on any one trade, remember to take margin into account. If you're using half your margin capacity, a 2% loss on the value of a stock position will equal a 3% loss of your actual capital.

It’s always a good idea to take the time to learn how your broker calculates account equity. It can be very confusing, but understanding the calculation will enable you to anticipate how much margin capacity you'll be left with after your online future trading ventures. Always keep track of your margin status. Check it every morning and at the end of every online future trading day. Loosing track of your margin use can cause serious problems. But don't worry about margin interest. Your broker will charge interest on the borrowed amount, but the interest rate is low and the cost is extremely small if you're trading profitably.

In general, use margin only in markets with a strong bullish direction. You can't use margin capacity to increase the sizes of short positions in a bear market, anyway (though you must have a margin account to short.) Whenever the online future trading market seems overbought, unsteady, or unclear in its direction, get completely out of margin before a downturn can take place. With careful use margin can greatly increase your profits. Without it, it can devastate your online future trading capital.
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