Every schoolboy is familiar with the physics concept: “for every action there is an equal and opposite reaction.” For unknown reasons, financial markets appear to follow the same basic laws that affect our physical world. Therefore, in the market any price move up or down must be followed by a similar move in the opposite direction. In futures trading, this is called a retracement. Retracements provide futures traders with a valuable reference point that can be used to predict the occurrence of price turns. They can also help a trader measure the strength of a preceding move.

For futures traders, the most important retracement strength levels are 40%, 50%, 60% and 100%. For example: If the market moves upward 6 price points, then pulls back 3 points, it has experienced a 50% retracement. The same holds true if the market declines 6 points, then rallies 3 points. This is also a 50% retracement. Should the market reverse by the full 6 points, returning to its original starting point, a 100% retracement has occurred. Traders call this a double bottom.

Futures traders can use the strength of a retracement to gauge the strength of market movement and predict potential trends. Futures traders use retracement levels as a general guide in making trading decisions and choosing low-risk entry points. If a retracement is shallow, 40% or less, the prior move is considered strong and a counter move should be equally strong. A deep retracement, above 60%, indicates a weak prior move and should garner a correspondingly weak counter move. Futures traders look for buying and selling opportunities at key retracement levels. Learning to identify and trade on retracements correctly is a valuable asset in the futures trader’s toolbox.

What is the risk/reward ratio? The concept is fairly simple, though the execution is more complex. For each trade you compare the amount of risk to the potential amount of reward. In other words, what is the downside risk compared to the upside profit potential?

If the risk outweighs the potential profit, DON’T make the trade.
If the potential profit outweighs the risk, DO make the trade.

When futures traders are at work, they are constantly evaluating each tick of the market in terms of the risk/reward ratio. They are looking for trades that will give them the least risk while gaining the most profit. The risk/reward ratio can help a trader determine which of several possible trading actions will potentially be most profitable. The concept is fairly simple, so how hard can it be to execute? Much harder than you think!

Using the risk/reward ratio. The problem many futures traders have in utilizing the risk/reward ratio is that market movement and the actual risk or reward value of any trade can never be objectively or precisely pre-determined. No one can know what will actually happen in the future, whether that future be a minute from now, an hour from now, tomorrow or next week. A futures trader is limited to technical analysis and common sense. Based on previous market action and previous trading experience, he can predict what might happen, but the actuality must await the event.

Savvy futures traders watch technical support and resistance levels to help determine risk/reward ratios before entering a trading position. It is human nature to follow the pack, to buy on an upturn and sell on a downturn. Savvy traders have learned to watch the small changes in support and resistance levels to time their trades to minimize risk and maximize profit. Selling into a rally has greater potential profit than buying with the pack. If you sell into strength, you are guaranteed plenty of buyers eager to purchase what you’re selling. If you buy into a rally, the rally will eventually peter out and you’ll be caught chasing the trend downward, losing money at every tick. Smart traders have already taken their position before the market starts to run upwards. Even if you do not sell at the peak of the run, you will have made a profit. Novice traders often get greedy when they are in this position. It is possible to wait too long to sell and get caught when the market corrects and heads down again. Remember: You’ll never go broke making a profit, even a small one. Small profits add up.

Likewise, the time to buy is often when the market takes a small dip. Buy on a pullback to give yourself a better entry point and higher profit when the stock rallies again. Though it goes against the norm, often your best risk/reward ratio can be realized by doing the opposite of what the pack is doing.

Human physiology affects our ability to achieve the mental, physical and emotional control needed to succeed as a futures trader. Like primitive hunters, futures traders are competing in a hostile world that demands total concentration and lightening reflexes to survive. All the technology we use can make many of our tasks, like analysis and charting, easier and can increase our profitability as futures traders; but technology is just a tool. Ultimately, we must rely on our mind and our body to pull the trigger and make the trade.

The goal of the futures trader is to achieve the total synergy of mind and body called the Alpha Zone. You have entered the Alpha Zone when your mental, physical and emotional control is at its peak. When this happens you are trading “in the zone.”

While some traders utilize biofeedback techniques to help them learn to achieve this state, there are a number of common sense things you can do to get yourself in the zone.

• Listen to your biological clock. Humans are hard wired to hunt during the day and sleep at night. Over the centuries though the human clock has gotten shaken up a bit, so that today we don’t all reach our optimum operating peak at the same time of day. (We’ve all know people whose brains don’t seem to click on until noon, the “not a morning person” types.) Try to trade during the time of day when you know you’re at your best. You can help yourself by trading in a bright, well-lit area with, preferably, a fair amount of natural light. Light, particularly sunlight, makes us more alert.
• Tune up your body.  Trading is a sedentary occupation. Bodies at rest are easily fatigued. Jump-start your metabolism with an energizing walk or run early in the morning. During the day, relieve fatigue and stimulate your muscles with stretching or isometric exercises. Squeezing a small rubber ball helps some traders stay alert and focused.
•  Fuel your body. Don’t start your day with sugary foods. At first your blood sugar will spike and you’ll feel alert. But as your blood sugar drops during the day, you’ll feel increasingly fatigued and your performance will suffer. Some traders snack on energy bars mid-morning and afternoon to keep their bodies fueled. Make sure you check ingredients and avoid bars with high sugar contents. Sugary snacks will send you quickly careening from high alertness to dragging fatigue. Protein and complex carbohydrates will help you achieve and maintain alertness and concentration. However, beware of naturally sleep-inducing foods such as turkey, milk, bananas, fish and egg whites. Foods that can perk you up include coffee, tea, chocolate, soft drinks, and herbal teas. Be cautious about using caffeine to maintain alertness. It can send you on the same peak and valley ride as sugar, with increased caffeine needed to achieve the same level of alertness each time the previous dose wears off.
• Control your environment. Dry, cool air will help keep you alert and focused, as will bright light, particularly natural light. The smell of peppermint increases alertness. A spritz of mint in the air a couple of times between noon and 1 p.m. can help get you through the lunchtime doldrums. Dull, repetitive sounds like a computer or fluorescent light humming can be sleep-inducing. Sharp, irregular sounds like loud conversation or a radio can be distracting. A set of soft earplugs from your local drugstore can solve both problems, improving concentration.
• Recharge your batteries. Adequate sleep improves both performance and alertness. For your body to operate at peak efficiency, you must get enough sleep to enter the REM (rapid eye movement) cycle which promotes learning, creativity and imagination. This is also the most restful of the four sleep cycles and necessary to fully recharge your body’s battery.

• Cheapskate. Many people are foolishly cheap. They are so anxious to start trading on the futures markets that they ignore the necessity of first acquiring the proper education, tools and software to succeed. These people will lose more money in their first round of trades than they would have spent on the tools that would have allowed them to succeed. You can’t be “penny wise but pound foolish,” as my grandmother would say. Don’t nickel and dime your training budget. If you truly want to succeed as a futures trader, spend the money to learn from the best and acquire the best tools available. Click here to hear what my students have to say and learn more about my Futures Trading Secrets Course.
• Impatient. We lived in a society increasingly driven by instant gratification. We don’t want to wait for it or earn it; we want it now! Futures trading is a fast-paced, risk-filled environment that seems to attract people who like to live in the fast lane. These people are so blinded by the dream of instant wealth that they neglect their training, fail to take the time to develop a reliable system, refuse to stick with their system and, as a result, crash and burn. As grandmother would say, “You have to crawl before you walk and walk before you run.” If you want to succeed as a futures trader, slow down and take the time to learn the ropes and develop and practice your system.
• Greedy. Futures trading is not the way to get rich quick, though some seminar organizers use that as a marketing ploy to lure the unwary. Successful futures traders are not  gamblers. You cannot succeed by trading out of greed or desperation; or as my grandmother would say, “A fool and his money are soon parted.” Using emotion as a basis for trading is a quick path to failure. Success futures traders learn all they can, develop their system, work it and stick to it. Success as a futures trader comes from accumulated profits (often small at first), not one big score.
• Overconfident. If you want to succeed as a futures trader, park your ego at the door. Ego distorts rational thinking. The overconfident trader allows emotion to rule his actions. He is so certain that he is right that he will overstay a position to avoid admitting he was wrong. The market is fluid, ever changing. A futures trader must be fluid and able to change position to succeed. You will never be smarter than the market; the market will always win. As grandmother would say, “Pride goeth before the fall,” to which granddad would add, “Don’t bump your nose on the way down”