The Four Biggest Mistakes In Futures Trading

INTRODUCTION 1
The Bad News, The Worse News, The Good News and
The Better News 1
Why So Many Fail 1
What Sets Futures Trading Apart 2
Attacking From The Bottom Up Versus The Top Down 3
One Word of Warning 4
Topics To Be Covered 5
MISTAKE #1: LACK OF A TRADING PLAN 7
What is Mistake #1 7
Why Do Traders Make Mistake #1 8
The Recipe For Trading Success
(That Nobody Wants To Hear) 10
How To Avoid Mistake #1 11
The Litmus Test 12
How Much Capital Will You Commit To Futures Trading 13
What Market or Markets Will You Trade 14
What Type of Trading Time Frame Is Best For You 16
What Type of Trading Method Will You Use 20
What Criteria Will You Use To Enter a Trade 21
What Criteria Will You Use To Exit A Trade With A Profit 22
What Criteria Will You Use To Exit A Trade With A Loss 23
A Word Of Advice: Adhere to the Four Cornerstones 25
Go With The Trend 25
Cut Your Losses 26
Let Your Profits Run / Don’t Let Big Winners Get Away 26
Summary 27
MISTAKE #2 : USING TOO MUCH LEVERAGE 29
What is Mistake #2 29
Understanding Leverage 31
Why Do Traders Make Mistake #2 34
How To Avoid Mistake #2 35
The Role of Mechanical Trading Systems 37
Determining The Amount of Capital Required 37
Single Market Factor #1: Optimal f 37
Calculating Optimal f 39
Single Market Factor #2: Largest Overnight Gap 40
Single Market Factor #3: Maximum Drawdown 43
Contents
6 The Four Biggest Mistakes in Futures Trading
One Caveat to Analyzing Trading System Results 45
Arriving at a Suggested Dollar Value Per Contract 46
Arriving at an “Aggressive” Suggested Account Size 48
Arriving at a “Conservative” Suggested Account Size 49
Arriving at an “Optimum” Suggested Account Size
for Your Portfolio 50
Digging a Little Deeper 51
Summary 52
MISTAKE #3: FAILURE TO CONTROL RISK 55
What is Mistake #3 55
Why Do Traders Make Mistake #3 56
How To Avoid Mistake #3 58
Risk Control Method #1: Diversification
Among Different Markets 60
Risk Control Method #2: Diversification Among
Trading Time Frames and Methods 63
Risk Control Method #3: Proper Account Sizing 65
Risk Control Method #4: Margin-to-Equity Ratio 66
Risk Control Method #5: Stop-Loss Orders 69
Placing a Stop-Loss Order In the Market Place 69
Using Mental Stops 71
Not Using Stop-Loss Orders At All 73
The One Important Benefit of Stop-Loss Orders 74
Summary 75
MISTAKE #4: LACK OF DISCIPLINE 77
What is Mistake #4 77
Why Do Traders Make Mistake #4 81
How To Avoid Mistake #4 82
Overcoming The IQ Obstacle 83
A Word of Advice: Don’t Think, React 85
Avoid Simple Traps 87
The Cure for “Woulda, Shoulda, Coulda” 89
System Development versus System “Tinkering” 91
Asking The Right Question 93
Summary 96
CONCLUSION 98
APPENDIX A: Mathematical Formula for Standard Deviation 103
Standard Deviations 103