1. Lack of a Game Plan

One of the most important moves a futures trader can make is to develop a game plan consisting of basic guidelines.

2. Lack of Money Management

Good money management means you know your profit objective and the odds of being right or wrong, and control your risk with stops. You are better off with a trade where you might lose 1000 if you are wrong, or make 1000 if you are right, that would work six times out of ten, than to take a trade where you would make 1500 if you are right and lose only 500 if you are wrong, but works only one time out of three.

3. Failure to Use Protective Stop Loss Orders

This fits right in with a game plan and money management. It is the failure to use stop/loss orders once you enter a market — not mental stops, but real stops that cannot be removed. All too often commodity traders use mental stops because in the past they have been stopped out and then watched the market move in their direction. When a stop/loss order that was determined before you entered the market is hit, it means your analysis was wrong, your game plan was wrong. With a mental stop, as soon as the market has gone through your stop price, you no longer act like a rational human being. You are more likely to make mistakes because you are now operating on fear and hope. The only way to overcome this mistake is to have an unbreakable rule (and the discipline to follow it!) that stop/loss orders must be placed each and every time the market is entered. Another rule to follow; under no circumstances should an initial protective stop/loss order be changed to increase your risk, only to reduce it.

4. Taking Small Profits and Letting Your Losses Run

A very common mistake among futures traders is taking small profits and letting losses run. This is often the result of no game plan. After one or two losing trades, you are very likely to take a small profit on the next trade even though that trade could have turned into a large profit-maker that would offset all your losses. Letting your losses run often happens to new futures traders and is not uncommon among professional futures traders. After entering a market, you don’t know where to get out. Once you start losing money your tendency is to let your loss get larger and larger as you hope that the market will retrace to let you break even — which of course, it seldom does. This mistake is overcome by using predetermined stop/loss orders to prevent your losses from running, and following your game plan to take profits at your profit objective.

5. Overstaying Your Position

One of the most common mistakes of trading futures is overstaying your position, or simply failing to take profits at a predetermined level. There seems to be a natural law that the market is only going to allow one individual so much money before it starts to take it back. Yet, it is when you have these profits, especially paper profits in your account, that you often try to get the last rupee out of the trade. If the market meets your price objective and you are still in the market without a close stop/loss order, you are overstaying your position. All too often the market breaks sharply through your “mental stop” and from that price level, you watch your paper profits disappear before your eyes. Then you decide to hold on for a small rally, and the market never rallies enough. It drops back to break-even, and now you really begin hoping. Next thing you know you have a loss. Be aware that a large profit can turn into an even larger loss. This mistake can be overcome by the use of trailing stops raised closer to the market as your price objective is approached, or automatically taking profits at your price objectives.

6. Averaging a Loss

This is usually a holdover from trading stocks. In futures, with five or ten percent margin, averaging a loss can be disastrous to say the least. A typical approach is that after you have bought a future and it drops lower, you might figure that since it was a good buy then, it is a better buy now. You can also justify averaging down by figuring you will have a lower average entry price and require a smaller move to break even. Unfortunately, you will lose twice as much if the market continues against you, as it almost always does. There are approaches that will allow you to buy a market at one price level, add on at a lower level and add on again at even a lower level, as long as this was your predetermined game plan before you bought the first contract. You must also have an unmovable stop/loss order that takes you out of all contracts. This mistake is easily overcome by having a strict rule that you never average a loss unless your predetermined game plan called for buying the market at lower levels with an unmovable stop/loss order to take you out of all contracts if it is hit.

7. Meeting Margin Calls

Most often, meeting a margin call will only increase your loss. A margin call means you are wrong in the market and your position should be closed out. Margin calls are met because people do not want to admit being wrong and take a loss; because they hope the market will eventually go in their direction. Avoid meeting margin calls.

8. Increasing Your Commitment With Success

One of the most dangerous mistakes you can make in trading commodities is to increase your exposure, as you become more successful. Just by being successful you will risk more per trade because you have more money. But, because you have more money (and confidence) when successful, you are also likely to take larger percentage risks. Not surprisingly, this ruins more futures traders than a series of small losses. You can overcome this mistake by not allowing your percentage commitment to increase as you realize profits and by maintaining your stop/loss discipline.

9. Overtrading Your Account

…Or risking too large a percentage of capital on any single trade, either with too large a rupee risk per contract or by trading too many contracts for any single trade or by trading too many commodities. This also happens after a period of success when you “know” that the market is going to do something. You are so certain that this is going to be a really big move that you risk much more than the maximum 10% of your equity. Already emotionally out of balance, all it takes is a couple of limit moves against you and you are bust. To prevent this mistake from occurring, you must have a hard and fast rule that you can risk no more than a certain percentage of your equity on any trade regardless of how good the trade looks.

10. Failure to Remove Profits From Your Account

It is almost a natural law that the commodities markets over a given period of time will allow you to make only so much money and then you are going to have to start giving some back. When you make profits in the commodities markets, take some money out and put it somewhere else. You, as all commodity traders, will move in cycles. You will make some, lose some, make some, lose some. By taking money out of your account when you are profitable, you will not make the mistake of losing larger amounts of money when your down cycle begins.

11. Lack of Patience (Or Trading for the Excitement, Not for Profit)

Patience is a very important virtue in trading. It’s importance can never be emphasized enough. Studying the past history of a market you can isolate high probability trades and situations that offer exceptionally large profits.