Trading Errors

Error: Confusing trading with investing. Many traders justify taking trades because they think they have to keep their money working. While this may be true of money with which you invest, it is not at all true concerning money with which you speculate. Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him. A trader’s concern is making a wise and timely speculation, keeping his losses small by being quick to get out, and maximizing profits by not staying in too long, i.e., to a point where he is giving back more than a small percent of what he has already gained.

Error: Copying other people’s trading strategies. A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost. Trading copycats rarely come out ahead. You may have a different set of goals than the person you are copying. You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has. This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail. Trading futures is so personalized that it is almost impossible for two people to trade the same way.


Error: Ignoring the downside of a trade. Most traders, when entering a trade, look only at the money they think they will make by taking the trade. They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract. The buyer is convinced that the market will go up. The seller is convinced that the market has finished going up. If you look at your trades that way, you will become a more conservative and realistic trader.


Error: Expecting each trade to be the one that will make you rich. When we tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money. What people forget is that to be a winner, you can’t wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade. You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins. A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn’t mean you have to trade every day. It means that when you do trade, be quick to get out if the trade doesn’t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.

Error: Taking a trade because it seems like the right thing to do now. Some of the saddest calls we get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else’s opinion, it was the right thing to do. They thought that following the dictates of opinion was shrewd. They haven’t planned the trade, and worse, they haven’t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade. Sometimes, when you don’t fully understand what is happening, the wisest choice is to do nothing at all. There will always be another trading opportunity. You do NOT have to trade.

Error: Taking too much risk. With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk? It’s as though you know on an intellectual basis that trading futures is risky, but you don’t really take it to heart and live it until you find yourself caught up in the sheer terror of a major losing trade. Greed drives traders to accept too much risk. They get into too many trades. They put their stop too far away. They trade with too little capital. We’re not advising you to avoid trading futures. What we’re saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.


Two Trading related Films

Question. Have you seen the new Wall Street film, Money Never Sleeps? If so, what did you think?

The original film is, of course, a classic. I have no idea how many times I’ve seen it over the years, and no doubt will see it again several times in the future. I haven’t, as yet, seen the new one, but I fully expect to do so. 

It seems like the box office figures haven’t held up very well, but that’s not necessarily a reflection of the quality of the film where someone from a markets background is concerned. This doesn’t strike me as being one that requires the big screen experience, however, so I can see myself waiting for it to come out on DVD.

Should I not do that? I’d love to hear from folks who been. If so, leave a comment below with your thoughts.

A film I did see recently is Floored, the documentary about the decline of pit trading in the Chicago futures exchange arena. It was screened at the Vegas Futures & Forex expo, with the director in attendance. There were some interesting elements, but I’m not going to sing its praises from the rooftops or anything like that. Basically, it’s a tale of a disappearing business, which is part of they way things work in a free enterprise society. New, better ways replace older ones and folks who cannot adopt are left behind.

One of the most amazing scenes in Floored is one where a guy who clearly has embraced computer assisted trading is facing off against a floor trader. The latter is ranting about how computers are evil. It’s sad, really.

True False Questions

True or False

  1. The big money in trading is made when one can get long at lows after a big downtrend.
  2. It’s good to average down when buying.
  3. After a long trend, the market requires more consolidation before another trend starts.
  4. It’s important to know what to do if trading in commodities doesn’t succeed.
  5. It is not helpful to watch every quote in the markets one trades.
  6. It is a good idea to put on or take off a position all at once.
  7. Diversification is better than always being in 1 or 2 markets.
  8. If a day’s profit or loss makes a significant difference to your net worth, you are overtrading.
  9. A trader learns more from his losses than his profits.
  10. Except for commission and brokerage fees, execution costs for entering orders are minimal over the course of a year.
  11. It’s easier to trade well than to trade poorly.
  12. It’s important to know what success in trading will do for you later in life.
  13. Uptrends end when everyone gets bearish.
  14. The more bullish news you hear the less likely a market is to break out on the upside.
  15. For an off-floor trader, a long-term trade ought to last 3 or 4 weeks or less.
  16. Other’s opinions of the market are good to follow.
  17. Volume and open interest are as important as price action.
  18. Daily strength and weakness is a good guide for liquidating long term positions with big profits.
  19. Off-floor traders should spread different markets of different market groups.
  20. The more people are going long the less likely an uptrend is to continue in the beginning of a trend.
  21. Off-floor traders should not spread different delivery months of the same commodity.
  22. Buying dips and selling rallies is a good strategy.
  23. It’s important to take a profit most of the time.
  24. Of 3 types of orders (market, stop, and resting), market orders cost the least skid.
  25. The more bullish news you hear and the more people are going long the less likely the uptrend is to continue after a substantial uptrend.
  26. The majority of traders are always wrong.
  27. Trading bigger is an overall handicap to one’s trading performance.
  28. Larger traders can muscle markets to their advantage.
  29. Vacations are important for traders to keep the proper perspective.
  30. Undertrading is almost never a problem.
  31. Ideally, average profits should be about 3 or 4 times average losses.
  32. A trader should be willing to let profits turn into losses.
  33. A very high percentage of trades should be profits.
  34. A trader should like to take losses.
  35. It is especially relevant when the market is higher than it’s been in 4 and 13 weeks.
  36. Needing and wanting money are good motivators to good trading.
  37. One’s natural inclinations are good guides to decision making in trading.
  38. Luck is an ingredient in successful trading over the long run.
  39. When you’re long, limit up is a good place to take a profit.
  40. It takes money to make money.
  41. It’s good to follow hunches in trading.
  42. There are players in each market one should not trade against.
  43. All speculators die broke
  44. The market can be understood better through social psychology than through economics.
  45. Taking a loss should be a difficult decision for traders.
  46. After a big profit, the next trend following trade is more likely to be a loss.
  47. Trends are not likely to persist.
  48. Almost all information about a market is at least a little useful in helping make decisions.
  49. It’s better to be an expert in 1-2 markets rather than try to trade 10 or more markets.
  50. In a winning streak, total risk should rise dramatically.
  51. Trading stocks is similar to trading commodities.
  52. It’s a good idea to know how much you are ahead or behind during a trading session.
  53. A losing month is an indication of doing something wrong.
  54. A losing week is an indication of doing something wrong.
  55. One should favor being long or being short – whichever one is comfortable with.
  56. On initiation one should know precisely at what price to liquidate if a profit occurs.
  57. One should trade the same number of contracts in all markets.
  58. If one has $10000 to risk, one ought to risk $2500 on every trade.
  59. On initiation one should know precisely where to liquidate if a loss occurs.
  60. You can never go broke taking profits.
  61. It helps to have the fundamentals in your favor before you initiate.
  62. A gap up is a good place to initiate if an uptrend has started.
  63. If you anticipate buy stops in the market, wait until they are finished and buy a little higher than that.
Go to top