This article on Day Trading Rules in Futures is the opinion of Optimus Futures.
- No matter how skillful your day trading knowledge or execution, if it’s based on flawed assumptions, you may not achieve the level of success you’re after.
- There are many ways to be successful, but it takes only a handful of mistakes to sabotage your success.
- Knowing what “not” to do is perhaps more important than knowing what to do.
In other words, you may have to make improvements by “subtraction.” Not just making adjustments to your futures day trading rules, but questioning and potentially eliminating the foundation upon which those rules are established.
Furthermore, it’s not just a matter of scrapping something that doesn’t work. It’s about recognizing that many of your long-held assumptions about trading may be far from reality.
Flawlessly Executing a Bad Thesis
For example, imagine a disciplined trader who sticks to the rules of a system, patiently waiting for the setups, and executing the trade flawlessly. The problem is that the system was a consistent loser. It was a bad system from the get-go. And the trader’s assumptions—a) that the system was promising, and b) to stick to the system and execute its rules with minimal variation—did far more harm than good.
Negative outcomes due to bad assumptions are even worse in futures, given the amount of leverage in each trade. Sure, there are benefits to day trading futures, but be aware that there are also plenty of risks.
So, this is what we’re going to explore in this piece: how to critically examine your futures day trading rules; how to question the very assumptions you hold that may be packed with flaws; how to eliminate the practices that may be causing you more harm than good.
Five Things Professional Traders Don’t Do
1 – Professional traders don’t confuse reality with simulations
Here’s a hypothetical situation that’s a composite of real-life trading experiences. A person develops an automated scalping system that’s successful in demo mode. That person decides to let it loose, so to speak, in the live market while simultaneously running it on a separate demo account.
By the end of the day, the demo yielded $1,000 in profit while the live system generated more than $1,000 in losses.
What went wrong? Demos don’t simulate real supply and demand dynamics, meaning they often don’t give a realistic picture of slippage and order fills. The shorter the time frame, the worse the “tracking” between demo and live markets.
What’s the assumption? The assumption is that you can “practice” your trading in a demo environment. Yes, you can practice the “execution” part of it but you might not be able to simulate the live “outcome” of your execution.
What’s the fix? Bring your system into the live market as soon as possible. If you have to, trade a micro contract (in a high volume environment) to minimize your risks.
But don’t get stuck in an endless demo loop, where you may be wasting your time developing strong execution skills for a system that’s designed to fail.
2 – Professional traders are never ignorant of scheduled economic releases
Imagine a day trading session in which everything was working out well. Suddenly, your futures contract takes a major dive in just a matter of seconds, shaking you out of your position with a massive loss.
The market remains volatile for the next few minutes until it finally settles, continuing in the direction of your previous trade.
What went wrong? Maybe it was an FOMC announcement, or an earnings report, or a CPI or PPI release, or a jobs report.
Whatever it was, imagine how you’d feel once you realize that it was a scheduled event, and that you might have avoided it or traded around it if only you looked at an economic calendar.
What’s the assumption? The effect of economic fundamentals has very little to do with day trading environments. This assumption is true. As a day trader, you’re trading micro-levels of supply and demand; what investors would consider “market noise.”
Most of the time you’re better off trading technicals than fundamentals. But this doesn’t mean that major fundamental reports or events won’t affect your day trades. And that’s the erroneous assumption.
What’s the fix? To avoid getting T-boned by the market’s “response” to a fundamental event, keep an eye on economic releases, and always have a general awareness of what’s going on in the broader economy.
3 – Professional traders don’t trade without clear loss-limits
Here’s a common theme among new traders: they start small when they bring a new method to the live market, and if it works, they “go big,” often losing a good chunk of their trading account.
Maybe they found a profitable chart setup that seems to work more often than not. Many new traders who experience beginner’s luck often end up depleting their entire trading account in just a matter of days.
What went wrong? Considering that every trading system or method has its losing days, traders who move up in size often do so without setting clear loss-limits. Imagine ten trades in which only two are winners, enough to make up for all the losses.
What if those two winning trades happen to be the last trades in the sequence? If you blow all of your funds in the first set of trades, you may never make it to the end.
What’s the assumption? The dangerous assumption here is that a “winning system” will distribute the profitable trades among the losing trades evenly.
This assumption ignores the reality of uneven distribution. It’s also ignorant of the likelihood of extended losing streaks, the occurrence or duration of which can’t be mathematically determined.
What’s the fix? If you keep your losses to a set minimum (a % of your funds) for the session, for the week, and for the month, then your chances of blowing up your account may be minimized.
You’ll be able to trade for another day, hopefully making up your losses in a way that doesn’t violate the rules of your method.
Another thing to think about: Adhering to a strict loss limit prevents you from “revenge trading,” or taking on larger positions in an attempt to recover a loss. For even if you did revenge trade a few times, leading to more losses, your weekly or monthly limit would prevent you from harming yourself any further.
Now, if you can’t stick to a loss limit, well, that’s another issue for which you should take a vacation from trading.
4 – Professional traders don’t trade without measuring performance
You can’t judge the success of a method or performance if you have no benchmark by which to measure it. Here’s an easy example. You adopt a particular trading method that boasts a strong profit factor and win rate.
All of a sudden, your drawdowns are getting “uncomfortable.” You’re down 25%. It’s been that way for weeks. Up until this point, the method was doing really well. But now, it’s just producing one losing trade after another. So, you bail and drop the method.
What if the “average drawdown” was actually 35%, in which case you pulled out when such a level was to be hypothetically expected (based on past averages)? What if the “worst drawdown” was 60%?
Now, remember that the worst drawdown can always be exceeded, at which point you have some serious thinking to do. But you weren’t anywhere near either of the stats. Did you bail out too soon? You’ll never know. But what’s certain is that you closed out an unpleasant drawdown that might have been an expected part of the system.
What’s the assumption? The assumption is a stupid one: that you can trade without having to measure performance stats. This is more a matter of neglect than it is an assumption. Again, the problem is that you can never measure the success rate of any performance if you don’t take a look at the hard numbers.
What’s the fix? Look at all the stats that are relevant to you. It can be win rate, profit factor, risk-to-return ratio, average win, average loss, average drawdown, worst drawdown, mathematically expectancy, or anything else that might help you assess performance.
5 – Professional Traders Don’t Seek Out Trading Gurus
Unless you’re a professional trader working at an investment bank or any other firm where either speculative trading or hedging is part of the job, chances are that your “trading guru” is in the business to profit from teaching (not trading).
Chances are that the guru is using a demo to demonstrate trades (see rule #1). And chances are that you can’t see your guru’s “real” profit and loss statements. In short, there’s no way to validate whether your trading guru is a charlatan or the real thing.
What’s the assumption? You’re assuming a couple of things. The first, that your trading teacher knows more than you do, is likely right. But then you’re also assuming that your trading teacher is the “real mccoy” (you’ll never know unless you can see all of the person’s statements; and that’s something you’ll never see).
What’s the fix? Do your own homework. Do your own learning. Develop your own style based on real-market experience. Sure, you might learn a thing or two from a trading guru. But if you can’t see all of what the person does in a live market (and its outcomes), then you’ll never be able to distinguish what’s real from what’s fake.
The Bottom Line
Don’t get bogged down by making common mistakes that can easily be avoided. Now that you know what professionals don’t do. Here are a few Golden Rules that most professionals tend to follow.
Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
