Success as a futures trader is dependent on your ability to master technique, psychology and money management. Life as a trader can be phenomenally successful, but it can be equally risky, particularly while you’re learning to dot the i’s and cross the t’s. It would be a mistake to quit your day job until you’ve mastered the three elements of successful trading. Master only one and your lack of knowledge and expertise in either one of the other two areas may bring you to the brink of disaster and topple you over. Remember, mastery and balance of all three elements is vital to success.
In our next several posts we’re going to focus on each element of success. Today, let’s talk about money management.
Show Me the Money
Good money management is critical to success as a futures trader. You need to know:
- how to track of your results
- how to budget and set aside risk capital
- how to diversify
- and, as song goes, when to hold, when to fold and when to walk away.
Keep track. No matter how big or small the trade, always track your results. Keep a daily scoresheet so you know to the second how far ahead or behind you are. It’s essential information in planning your next move and deciding how much risk you can afford. You should also keep a daily trading diary that tracks not only your trades but the rationale behind your decisions, market factors you weighed, how you reacted, even how you felt that day. Periodically reviewing your diary will help you identify behavioral patterns so you can continually improve your technique.
Budget your risk. It’s like they say in Vegas, don’t gamble with money you can’t afford to lose. It’s the same with futures trading. Don’t trade with the rent or grocery money. Budget an amount you can afford to risk and stick to your budget. Trading funds should be considered venture capital — it might pan out, it might not. Trade small and learn your system before you increase your risk.
Diversify. You diversifying to decrease your risk. If you put all your eggs in one basket and win, you win big; but if you lose, you lose big. Divide your investment between several options and no one move will blow you out of the water. Your wins may be smaller but they’ll become more consistent and more numerous. In the long run, you’ll come out ahead.
Listen for alarm bells. As Kenny Rogers sings in The Gambler: “You got to know when to hold ’em, know when to fold ’em, know when to walk away and know when to run.” If you can’t walk away from a trade when something doesn’t seem right, you’ve got a problem. You have to listen for those internal alarm bells. Futures trading is like poker. For the uninformed and unwary it’s a high-stakes game of chance where the possibility that you’ll lose your shirt looms large. For the savvy and experienced trader, it’s a game of skill, technique and money management with the potential for huge rewards. The trick is in knowing the difference.
Visit the Futures Trading Secrets website to find out how you can master the essential elements of futures trading and learn the expert secrets that will allow you to become a successful futures trader.
Stay tuned. Next time: Psychology
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