Futures and options trading involves substantial risk of
loss and is not suitable for all investors. Clients may
lose more than their initial investment.
Past performance is not indicative of future results.
50 Rules For Futures Traders
A survey by the John Walsh Agency asked more than a thousand
experienced futures brokers what rules they follow for successful
futures trading. More than five thousand suggestions were
submitted. Here is a list of the futures trading rules they
mentioned most often:
Don't be afraid to be a sheep.
1. Follow the trends. This is probably some of the hardest
advice for a trader to follow because the personality of
the typical futures trader is not "one of the crowd."
Futures traders (and futures brokers) are highly individualistic;
the markets seem to attract those who are. Very simply,
it takes a special kind of person, not "one of the
crowd," to earn enough risk capital to get involved
in the futures markets. So the typical trader and the typical
broker must guard against their natural instincts to be
highly individualistic, to buck the trend.
2. Know why you are trading the commodity markets. To relieve
boredom? To hit it big? When you can honestly answer this
question, you may be on your way to successful futures trading.
3. Use a trading system, any system, and stick to it.
4. Apply money management techniques to your trading.
5. Do not overtrade.
6. Take a position only when you know where your profit
goal is and where you are going to get out if the market
goes against you.
7. Trade with the trends, rather than trying to pick tops
8. Don't trade many markets with little capital.
9. Don't just trade the volatile contracts.
10. Calculate the risk/reward ratio before putting a trade
on, then guard against holding it too long.
11. Establish your trading plans before the market opening
to eliminate emotional reactions. Decide on entry points,
exit points, and objectives. Subject your decisions to only
minor changes during the session. Profits are for those
who act, not react. Don't change during the session unless
you have a very good reason.
12. Follow your plan. Once a position is established and
stops are selected, do not get out unless the stop is reached
or the fundamental reason for taking the position changes.
13. Use technical signals (charts) to maintain discipline
- the vast majority of traders are not emotionally equipped
to stay disciplined without some technical tools.
Use discipline to eliminate impulse
14. Have a disciplined, detailed trading plan for each
trade; i.e., entry, objective, exit, with no changes unless
hard data changes. Disciplined money management means intelligent
trading allocation and risk management. The overall objective
is end-of-year bottom line, not each individual trade.
15. When you have a successful trade, fight the natural
tendency to give some of it back.
16. Use a disciplined trade selection system: an organized,
systematic process to eliminate impulse or emotional trading.
17. Trade with a plan - not with hope, greed, or fear.
Plan where you will get in the market, how much you will
risk on the trade, and where you will take your profits.
Cut losses short - let profits run.
18. Most importantly, cut your losses short and let your
profits run. It sounds simple, but it isn't. Let's look
at some of the reasons many traders have a hard time "cutting
losses short." First, it's hard for any of us to admit
we've made a mistake. Let's say a position starts going
against you, and all your "good" reasons for putting
the position on are still there. You say to yourself, "It's
only a temporary set-back. After all, you reason,
the more the position goes against me, the better
the chance it has to come back - the odds will catch up."
Also, the reasons for entering the trade are still there.
By now you've lost quite a bit; you sell yourself on giving
it "one more day." It's easy to convince yourself
because, by this time, you probably aren't thinking very
clearly about the position. Besides, you've lost so much
already, what's a little more? Panic sets in, and then comes
the worst, the most devastating, the most fallacious reasoning
of all, when you figure, "That contract doesn't expire
for a few more months; things are bound to turn around in
So it goes; so cut those losses short. In fact, many experienced
traders say if a position still goes against you the third
day in, get out. Cut those losses fast, before the losing
position starts to infect you, before you "fall in
love" with it. The easiest way is to inscribe across
the front of your brain, "Cut my losses fast."
Use stop loss orders, aim for a $500 per contract loss limit...or
whatever works for you, but do it.
Now to the "letting profits run" side of the
equation. This is even harder because who knows when those
profits will stop running? Well, of course, no one does,
but there are some things to consider. First of all, be
aware that there is an urge in all of us to want to win...even
if it's only by a narrow margin. Most of us were raised
that way. Win - even if it's only by one touchdown, one
point, or one run. Following that philosophy almost assures
you of losing in the futures markets because the nature
of trading futures usually means that there are more losers
than winners. The winners are often big, big, big winners,
not "one run" winners. Here again, you have to
fight human nature. Let's say you've had several losses
(like most traders), and now one of your positions is developing
into a pretty good winner. The temptation to close it out
is universally overwhelming. You're sick about all those
losses, and here's a chance to cash in on a pretty good
winner. You don't want it to get away. Besides, it gives
you a nice warm feeling to close out a winning position
and tell yourself (and maybe even your friends) how smart
you were (particularly if you're beginning to doubt yourself
because of all those past losers). That kind of reasoning
and emotionalism have no place in futures trading; therefore,
the next time you are about to close out a winning position,
ask yourself why. If the cold, calculating, sound reasons
you used to put on the position are still there, you should
strongly consider staying. Of course, you can use trailing
stops to protect your profits, but if you are exiting a
winning position out of fear...don't; out of greed...don't;
out of ego... don't; out of impatience...don't; out of anxiety...don't;
out of sound fundamental and/or technical reasoning...do.
19. You can avoid the emotionalism, the second-guessing,
the wondering, the agonizing, if you have a sound-trading
plan (including price objectives, entry points, exit points,
risk-reward ratios, stops, information about historical
price levels, seasonal influences, government reports, prices
of related markets, chart analysis, etc.) and follow it.
Most traders don't want to bother; they like to "wing
it." Perhaps they think a plan might take the fun out
of it for them. If you're like that and trade futures for
the fun of it, fine. If you're trying to make money without
a plan - forget it. Trading a sound, smart plan is the answer
to cutting your losses short and letting your profits run.
20. Do not overstay a good market. If you do, you are bound
to overstay a bad one also.
21. Take your lumps; just be sure they are little lumps.
Very successful traders generally have more losing trades
than winning trades. They don't have any hang-ups about
admitting they're wrong, and have the ability to close out
losing positions quickly.
22. Trade all positions in futures on a performance basis.
The position must give a profit by the end of the third
day after the position is taken, or else get out.
23. Program your mind to accept many small losses. Program
your mind to "sit still" for a few large gains.
Learn to trade from the short side.
24. Most people would rather own something (go long) than
owe something (go short). Markets can (and should) also
be traded from the short side.
25. Watch for divergences in related markets - is one market
making a new high and another not following?
26. Recognize that fear, greed, ignorance, generosity,
stupidity, impatience, self-delusion, etc. can cost you
a lot more money than the markets going against you,
and that there is no fundamental method to recognize these
27. Don't blindly follow computer trading. A computer-trading
plan is only as good as the program. As the old saying goes,
"Garbage in, garbage out."
28. Learn the basics of futures trading. It's amazing how
many people simply don't know what they're doing. They're
bound to lose, unless they have a strong broker to guide
them and keep them out of trouble.
Standing aside is a position. Patience
29. Standing aside is a position.
30. Client and broker must have rapport. Chemistry between
account executive and client is very important; the odds
of picking the right AE the first time are remote. Pick
a broker who will protect you from yourself: greed, ego,
fear, or subconscious desire to lose (actually true with
some traders). Ask someone who trades if they know a good
futures broker. If you find one who has room for you, give
him your account.
31. Sometimes, when things aren't going well and you're
thinking about changing brokerage firms, think about just
changing AEs instead. Phone the manager of the local office,
let him describe some of the other AEs in the office, and
see if any of them seem right enough to have a first meeting
with. Don't worry about getting your account executive in
trouble; the office certainly would rather have you switch
AEs than to lose your business altogether.
32. Broker/client psychology must be in tune, or else the
broker and client should part company early in the program.
Client and broker should be in touch repeatedly, so when
the time comes, both parties are mentally programmed to
take the necessary action without delay.
33. Most people do not have the time or the experience
to trade futures profitably, so choosing a broker could
be the most important step to successful futures trading.
34. When you go stale, get out of the markets for a while.
Trading futures is demanding, and can be draining - especially
when you're losing. Step back; get away from it all to recharge
Thrill seekers usually lose.
35. If you're in futures simply for the thrill of gambling,
you'll probably lose, because chances are the money does
not mean as much to you as the excitement. Just knowing
this about yourself may cause you to be more prudent, which
could improve your trading record. Have a business-like
approach to the markets. Anyone who is inclined to speculate
in futures should look at speculation as a business, and
treat it as such. Do not regard it as a pure gamble, as
so many people do. If speculation is a business, anyone
in that business should learn and understand it to the best
of his/her ability.
Approach the markets with a reasonable
36. When you open an account with a broker, don't just
decide on the amount of money, decide on the length of time
you should trade. This approach helps you conserve your
equity, and helps avoid the Las Vegas approach of "Well,
I'll trade till my stake runs out." Experience shows
that many who have been at it over a long period of time
end up making money.
37. Don't trade on rumors. If you have, ask yourself this:
"Over the long run, have I made money or lost money
trading on rumors?" O.K. then, stop it.
38. Beware of all tips and inside information. Wait for
the market's action to tell you if the information you've
obtained is accurate, then take a position with the developing
39. Don't trade unless you're well financed, so that market
action, not financial condition, dictates your entry and
exit from the market. If you don't start with enough money,
you may not be able to hang in there if the market temporarily
turns against you.
40. Be more careful if you're extra smart. Smart people
very often put on a position a little too early. They see
the potential for a price movement before it becomes actual.
They become worn out or "tapped out" and aren't
around when a big move finally gets underway. They were
too busy trading to make money.
Never add to a losing position.
41. Stay out of trouble, your first loss is your smallest
42. Analyze your losses. Learn from your losses. They're
expensive lessons; you paid for them. Most traders don't
learn from their mistakes because they don't like to think
43. Survive! In futures trading, the ones who stay around
long enough to be there when those "big moves"
come along are often successful.
44. If you're just getting into the markets, be a small
trader for at least a year, then analyze your good trades
and your bad ones. You can really learn more from your bad
45. Carry a notebook with you, and jot down interesting
market information. Write down the market openings, price
ranges, your fills, stop orders, and your own personal observations.
Re-read your notes from time to time; use them to help analyze
46. "Rome was not built in a day, and no real
movement of importance takes place in one day. A speculator
should have enough excess margin in his account to provide
staying power so he can participate in big moves.
47. Take windfall profits (profits that have no sound reasons
48. Periodically redefine the kind of capital you have
in the markets. If your personal financial situation changes
and the risk capital becomes necessary capital, don't wait
for "just one more day" or "one more price
tick; get out right away. If you don't, you'll most
likely start trading with your heart instead of your head,
and then you'll surely lose.
49. Don't use the markets to feed your need for excitement.
50. Always use stop orders, always...always...always.