Lessons from the Pros


Futures Trading: The Hardest Easy Money You Will Ever Make

“What is Futures trading?” Was asked by most professional Futures traders early on, before they gained the experience needed to survive as a trader.

What is Futures Trading?

Futures trading is a way to participate in the Financial and Physical Commodity markets using very small amounts of capital (margin) to control a very large contract size, this is known as leverage.  The Futures Industry is highly regulated.  All Futures contracts are standardized so everybody knows what to expect while in a position.  Futures contracts are simply a derivative of a cash market product.  The startup cost and commissions are much less than the Equity markets.

But just like any worthwhile endeavor, there is a lot more to learn before you can receive the rewards of a professional trader.  The following article will outline some of the obstacles and expectations of becoming a professional trader.

Positioning Yourself to be a Successful Futures Trader

For years people have swarmed to the Futures markets hoping to find the holy grail trading system and get rich overnight. If you really believe there is such a thing as the holy grail trading system, then why don’t more people quit their day jobs in search of this elusive creature? Part of the reason would be because they are smart enough to know it does not exist. Fortunately for people who learn to trade well, the dreamers who do believe in a holy grail are plentiful and once one trading account is blown up along comes two or three more dreamers to replace them.

Successful futures trading requires extensive ongoing education, repetition of what you have learned, a back tested and written trading plan explaining your trading style, risk management rules, a well capitalized trading account, plenty of free time to analyze the markets both post and pre market, discipline to follow rules and the list goes on.  Learning to trade is not just a financial obligation.  Opening a trading account with $5,000 and having a computer with charts hardly qualifies you as a Professional futures trader.  You must be willing to commit time and make sacrifices along the way.

The rewards of trading are endless, but the skills to maintain this status is an ongoing process.  For dreamers a Professional trader is somebody who has made millions or billions of dollars trading, has 3 or 4 homes, drives expensive cars and treats money with complete disregard.  There is nothing further from the truth of a Professional trader.  While there may be a handful of Professional traders like this in the world the majority live a completely different lifestyle than the dreamer thinks they do.

Most people who trade live a lifestyle well below their means.  Even though they have made enough money to buy most of the lavish things in life they choose to live within their means.  Many self made millionaires choose to live this same way.  As Tom Baldwin, worlds greatest Bond trader once said about trading, “live by the sword, die by the sword.”  Follow your trading plan regardless through the ups and downs.

Free Trading WorkshopI seem to be getting asked more frequently now by students about how much money they can expect to make as a trader.  Imagine how difficult it is to answer that question.  How much money you can expect to make as a Professional trader is as individual as your fingerprint is.  For each of us the term successful means something different.  Being successful does not have to mean making millions of dollars either.  For one trader making $50,000 per year is living very comfortable.  For others they will want to make $200,000 per year.  While some will be happy to make just enough to supplement another income they already have.

A lot depends on the lifestyles each of us has chosen.  If you have expensive taste and feel you must have the biggest, fastest, most expensive, etc toys then you will need much more money to live.  For others they will be content to make a comfortable living and save for their future retirement.  There is no magical number anybody can give you to expect to make in the Futures markets.  You want to be a successful Professional trader?  All you need is a true passion for trading.  This means not trading because you are only doing it for the money, but because you love to trade.  Then because you are doing something you are passionate about you cannot help but be successful because you will be happy doing what you are doing.  Again successful does not mean you are making millions of dollars.

Another difference between Professional and Dreamer type of traders is risk management.  Professional traders are more concerned with risks than they are rewards.  The dreamer on the other hand comes into every trade with the attitude of, “Dow much can I make on this trade?”  With no respect to risk this type of attitude is a recipe for disaster.

Risk Management and Futures Trading

Because I have been trading Futures for 25 years many think I am a great trader.  To be honest, I am an average futures trader.  What I am great at – risk management.  Every trade I look to enter the first place I look on the chart is the point where I will be wrong on my trade.  As soon as I see this I know two things:

  • How much reward I will need to make this a good trade?
  • Is this risk within 1-2% of my account size that I am willing to take?

Many successful traders use a good risk to reward ratio for each of their trades.  Since trading has no guarantees of success we must be prepared for a loss or a series of losses.  This allows us to have larger winners than our losers.  A typical ratio is 1:3.  This means if you risk $100 (your protective stop) that your profit potential should be approximately $300 ( 3 times your risk).  Once you have a winning trade ($300) you now have an equity buffer of 3 losses ($100 each) before you are back to even.  Too many dreamers try and trade just the opposite and risk $300 to only make a quick $100.  Upside down risk/reward ratio will cause this trader to hold onto losers too long and cut their profits short, not a good plan for having longevity in your trading.

Each trader must define how much risk they are willing to accept for each trade.  For most short term traders the general consensus is 1-2% of their trading account.  With such small percentages you can see why having an adequate trading account size is important.  If you have a very small trading account and your stops can only be $50 – $75 each you would do better to trade another product, perhaps an ETF (Exchange Traded Fund) until you have enough trading capital to fund your trading account adequately.

If a trader uses the rule of amount to risk they would have to be wrong almost 100 times in a row using 1% of their account or almost 50 times in a row using 2% before they wipe out their trading account.  While anything is possible in trading it is highly unlikely if the trader uses the exact strategy as planned for each trade.  If you are an emotional trader with no trading plan and take emotional trades then it is very possible you will wipe your trading account even if you use 1% of your account as your stop.

While this article may have sounded a bit negative about some areas of Futures trading I did this intentionally.  There are too many media ads showing all the promises of getting rich trading Futures.  At Online Trading Academy each of our classes will show the trader about risk management and how to use it.  We want to help you become Professional risk managers as well as helping you learn to trade.

What it Takes to Trade Futures

In closing remember that Futures trading can be as rewarding as you want to make it.  It will be hard and take dedication on your part.  There will be some bumpy roads along the way.  But remember, a road with no obstacles probably does not lead anywhere.  If you truly have a passion for trading the Futures markets are where you need to be trading, once you have spent some serious screen time studying and trading the markets and then getting a better understanding of your psychology towards trading you will be on your way to being successful as “you” have defined success.

“Do not go where the path may lead, go instead where there is no path and leave a trail.”  Ralph Emerson

– Don Dawson

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.