Top 10 Futures Trading Do’s

Here are 10 simple steps you can take to increase your potential for success in trading futures.

1. DO have a trading plan

Some of the best advice you’ll ever get from experienced traders is to “plan your trade and trade your plan.” So, before you place a trade, know the answers to these questions:

  • Where is my entry point? Why am I placing it there?
  • Where is my protective stop?
  • Where will I begin to take profits?

2. DO stick with your plan

When you have a trading plan for entry, exit and profit-taking, you won’t have to make tough decisions as the market is moving. You will already know what to do. While some flexibility is also important, remember that you came up with your plan for a reason. Nothing is worse than your broker calling you with bad news, and having to make an immediate decision.

3. DO know your risk

Knowing how much you are willing to risk on any one particular trade is just as important as knowing how much you are willing to risk on trading in general. An account should always be opened with risk capital, i.e., money that you can walk away from if lost, without any hardship. For individual trades, set a risk limit and place a stop order there so the market can’t get away from you. Also, be aware that you might be able to use options on futures as a way of limiting risk. Ask your RJO Futures broker how this works.

4. DO take profits

Most new traders seem to have an aversion to taking profits. Funny, but true. That’s because they seem to think that the market will always go their way and never reverse. But, that’s not the way the markets work. You have to exit a trade to turn that position into cash. Don’t let greed get the best of you. If you have profits, take them! The markets have been around for hundreds of years, and they’re not going anywhere. That one trade that is making a lot of money is not the only trade you will ever make.

5. DO be aware of margin

Leverage is one of the great benefits of trading futures, and that means margin requirements on futures products tend to be far less than those for stocks. And, it means both profits and losses can add up quickly in your account. Initial margin is the amount needed to initiate a new position. Maintenance margin is the amount needed in your account to avoid a margin call. Margin excess (available cash) is the amount of money available for initial margin to add new positions. Margin calls occur when the cash in your account falls below the maintenance margin requirement for all your positions. If that happens, you must deposit additional funds or liquidate enough of your positions to eliminate the margin call.
A margin call tells you that you’re in trouble. Experienced traders typically use just 30%- 50% of their total account for margin.

6. DO learn how to place orders

Every business has its own lingo, and futures is no exception. Learning how to correctly place an order when speaking with your broker or trade execution desk can save you many problems—and a lot of money. A mistake in placing a buy order when you meant to sell or vice versa is one of the most devastating errors you can make. On a new position, you would hold the opposite of what you wanted. On exiting an existing position, you’d be doubled up instead of flat. Be sure to say “buy” if you want to go long and “sell” if you want to go short. A variety of order types are available to help you get in or out of the market exactly as you wish. The most common is a market order, which is executed immediately upon entry. Other types include limit, stop, stop-limit, fill- or-kill, market on open and market on close. Not all markets accept all orders. Ask your RJO Futures broker about order types, when you might want to use them and whether they are available in the market you want to trade.

7. DO ask questions

There are no dumb questions when it’s your money on the line. Go ahead and ask your RJO Futures broker to find out the answer. For starters, the more you know the less likely you’ll experience errors in trading or due to miscommunication. Your broker knows that a more-informed client is a more-loyal client— and has the potential to make more money in the markets, which is good for you both.

8. DO be patient

Be patient and think everything through before making a decision. There is always another day and another market. Take your time. And if you find yourself getting too emotional, compose yourself. A well-thought- out decision is usually better than a hasty one.

9. DO accept responsiblity for your money.

The funds you send into your trading account are your money—and your responsibility. Only you truly know how important your trading money is to you, and you shouldn’t be swayed by what you hear from a broker, newsletter writer or TV commentator. Trading funds should be risk capital, which means that if you lose it all, you won’t suffer any adverse affects to your life. In other words, don’t risk the mortgage money on trading. Anything can happen in the futures markets.

10. DO enjoy the experience

Trading can be one of the most rewarding experiences of your life—not just financially, but also mentally. Successful traders get a feeling of accomplishment when they do their homework, plan out a trade and execute the trade to profitability. Every trader—including the most successful professional traders in the world—started at the beginning. Take your time and enjoy.

Top 10 Futures Trading Don’ts

Knowing what not to do is just as important as the “do’s” when it comes to trading futures markets. As with most “don’ts” in life, the following 10 tips have been learned the hard way by many traders.

1. DON’T Confuse trading with Investing

Trading is a short-term venture. You enter a position expecting to exit quickly—from 30 seconds to several months, depending on your strategy. Investing is a longer-term activity, with positions that might last years. The only thing that trading and investing have in common is that you need to exit a position to turn it into cash. Other than that, they are inherently different and you should realize this when trading futures.

2. DON’T let emotions get in the way

Emotions—particularly fear and greed—move markets. Learn to divorce yourself from your fear and greed when making trading decisions because decisions based on emotion are often the wrong decisions. Don’t let your emotional attachment to money cloud your decision- making process. John Templeton, founder of Templeton Funds, was once asked how to know when to buy or sell a market. His response was simple, yet very complex: “I buy markets when everyone else wants to get out of them, and I sell markets when everyone else wants to get into them.” This means that a mass thought process played an important role in his decision-making process. When everyone else is scared to death to be in a particular market, he would like to buy. When everyone else thinks a market is the next big killing, he wants to sell. The Templeton Funds were one of the most successful groups of funds on Wall Street.

3. DON’T let a winner turn into a loser

If you have a winner on the books, protect it. Don’t let it turn into a loser. There is nothing more demoralizing than to have a 10K winner turn into a 20K loser. And don’t think it won’t happen to you; it can happen to anyone. Talk to your RJO Futures broker about stop orders and other techniques to help you take profits.

4. DON’T forget the importance of Open Interest and Volume

All traders should watch open interest and volume because those two numbers will tell you the market’s depth. A general rule of thumb is that the higher the open interest and volume, the better the fills in that market. Open interest tells you how many positions exist in the market. Volume tells you how much trading has been done in that market. If the open interest is low, then there are not many market participants. The larger the open interest, the larger the number of market participants and the less likelihood it is being dominated by a single entity. Paying attention to open interest will help you get out of a market before its First Notice Day, when those who have a desire to take or make delivery declare their intentions. Most speculators get out of the upcoming delivery month before this happens.

5. DON’T put all your eggs in one basket

Diversifying the markets you trade allows you to spread out your risk. This way, when one market is down, another might be showing positive returns. On a portfolio basis, diversification can help stabilize market volatility. Studies on the performance of managed futures funds have shown that over lengthy periods, investors didn’t have to sacrifice much in returns to get reduced volatility. Talk to your RJO Futures broker about how a managed futures account could diversify your entire investment portfolio.

6. DON’T trade on rumors

Rumors don’t follow any rules. Anybody can make up a rumor at any time with no evidence to back it up. Trading on rumors will result in bad decisions more often than not. Don’t do it!

7. DON’T pick market tops and bottoms

You will probably never sell the exact top of a market or buy the exact bottom of a market. If it happens, it is generally simply luck. Professional traders know better than to even try. So avoid putting that pressure on yourself and instead just watch the trend and your indicators for signals that confirm the market’s direction

8. DON’T wait to “catch up” on a losing trade

Cut your losses if a trade is heading south. It might be hard to admit you’ve made a mistake, but it’s even harder to lose more money. Many experienced traders get out if a position goes against them for three days straight. Use stop orders to help you get out
when you might otherwise be tempted to try and play catch-up.

9. DON’T forget to learn from your mistakes

Nobody is perfect when it comes to futures trading. And, each mistake can turn into a learning opportunity—whether you should have gotten out sooner or held on longer. Examine what the market was telling you at the time you made your mistakes and you could learn some valuable lessons.

10. DON’T just jump into trading futures

While the temptation to just get started might be great, trading futures without the proper tools and research can be a scary prospect. Take time to learn how the futures markets work, and how the market you’re interested in behaves. Take advantage of all the guides like this one from RJO Futures to improve your trading approach. Try trading in an online simulated account to gain confidence. And, finally, establish a good relationship with your RJO Futures broker, who can help guide you through the process of learning to trade futures and answer your questions.