Losing trades are inevitable to any trading plan and it’s the ability to manage these losing periods and the your primary role of preserving capital that will enable long-term survival and capital appreciation.
You must anticipate losses, expect them, plan for them, embrace them, grab them. Your first loss is your least loss. Most importantly do not take losses personally. They are an integral part of successful trading.
Sound money management philosophy and skills are absolutely fundamental to success to keep losses small. Successful futures traders work according to probabilities, aiming to win on average more than they lose. Whatever the approach, money management reduces the need to find the perfect system.
Large loss of capital
If your account equity declines by 50% at any stage, trading should be halted immediately and indefinitely until you reassess your trading goals. Is Futures trading for you? It is imperative to keep your individual losses small. The table below shows you the returns you will need to generate based on the loss of your original capital. If you lose 50% you need to make 100% return just to break even.
Smart money management starts with the trader starting with enough capital to withstand several losing trades. The trader must also conserve enough money to be able to add and keep adding to the infrequent, substantial, profitable move.
Like most things in life, you won’t succeed without discipline. Discipline is adhering to your established trading plan, including ‘stops’ and entry points. This is the most difficult yet most important rule of them all. For futures traders to become consistently profitable, they must have a high level of self-discipline with a well-defined trading strategy that essentially maximizes profitable trades and minimizes losing trades.
Drafting a trading plan is relatively straightforward – but it is the discipline to follow that plan that will distinguish capable traders from all others. During periods of profit, adhering to a trading plan is comparatively easy.
A speculator, no matter how knowledgeable, capitalized, or confident will never be consistently successful without discipline. During periods of loss, however, the very same trading plan will appear rigid and constricting – and it is at such times that a trader will be tempted to depart from the plan. Although you might want to deviate from your trading plan, doing so invalidates the reason for preparing it in the first place.
Remember the purpose of the plan was to provide guidelines to follow. Breaking from it will invariably lead to risk exposure that you were originally unprepared to take. The difficulty in maintaining the required level of discipline is one of the main reasons many traders adopt a system driven trading approach. These traders include professional hedge fund managers and Commodity Trading Advisers who use computer models to generate their buying and selling orders (ie there is no discretionary or ‘gut feel’ trading done).
The equity, futures and options markets are unpredictable in nature and thus cause a natural amount of inherent anxiety among the participants. The speculators ultimate success depends upon quickly identifying a losing trade, admitting the mistake and having the discipline to get out of the trade with a minimal loss rather than being stubborn and compounding a loser into an even bigger loss.
The lack of discipline can cause a trader to:
1. Abandon their trading plan.
2. Rush into or out of trades without enough information.
3. Be impatient and trade impulsively.
4. Trade too many markets with too little information and capital.
5. Ignore charts.
6. Fall victim to your emotions.
7. Not utilize stops.
By planning every trade from beginning to end you are forced to think about how far the market might move against you or with you. You can’t control the markets and most traders do a good job of trying to control themselves. A written trading plan is the only answer. It is critical that you create your plan when you are thinking clearly.
Continued in Pt 4…