How Futures Traders Can Turn Losses Into Wins

 

This article on futures traders and trading losses is the opinion of Optimus Futures.

How Futures Traders Turn Losses Into Wins

It doesn’t matter how long you’ve been trading futures and options—we will all have to experience trading losses and drawdowns at some point or another.

However, the way you handle trading losses can mean the difference between long-term success or failure in this game.

And that’s why it’s so important you learn how to lose as a trader. You see, there are several bad habits which can be developed if you don’t know how to lose the right way.

Don’t let a bad loss turn into:

  • Revenge Trading
  • Second-Guessing
  • Trading Emotionally and not Logically
  • High-End Tilt
  • Trading Desperately
But you know what?

It doesn’t have to be that way.

In fact, today, we’re going to share with you 3 teachable moments about trading losses, and how you can use them to dramatically improve your confidence and results.

But first, let’s take a look at some of the reasons why futures traders struggle in this market.

Why Some Futures Traders Are Coming Up Short

Before we get started, it’s critical you understand this:

Just because you make money on trade doesn’t make it a good trade. And just because you lose money on a trade doesn’t mean it’s a bad one. 

You see, futures trading is a an exercise in risk management and probabilities. Even the best strategies lose from time to time, while a terrible trader can always get lucky.

To improve as a futures trader, you need to be able to identify the difference between the two.

And that boils down to your performance over time as well as the decisions you make. If you stick to your strategy’s parameters and experience success over time, then you can assume that individual trading losses are a normal part of the process.

Conversely, making a lot of money on one trade and then losing it all over the next several likely means you got lucky on the first one.

So what are some of the main reasons why people lose money trading futures?

  • They don’t have a viable strategy (no edge)
  • They don’t trade with a plan
  • They have a plan but don’t follow their rules
  • They lack basic knowledge so they rely on others
  • They trade with money they can’t afford to lose (scared)
  • They fumble the execution (get in and out too early or too late)
  • They over-trade and lack discipline
The list runs deeper than this, but you get the picture, right?

So let’s how we can improve trading performance by tackling one of these issues head on.

Recovering From A Big Trading Loss

No one trade should make you emotionally unstable or make it impossible to recover. However, we see it happen all the time. Traders will fall in love with a story-line and fail to properly assess the risk.

All-in…YOLO…HODL…

These terms have been popularized throughout social media where futures traders were lauded for taking outsized risks.

For those who have been trading futures for a while, one concept becomes clear: The wealthier you become, the likelier you are to focus on capital preservation rather than growing it.

That’s why the world’s best futures traders only allocate a small percentage of their trading account into one trade or position.

And when you’re dealing with trading commodity futures…there is just so much stuff that’s out of our hands, like:

  • Natural disasters (hurricanes, drought, storms, etc.)
  • Economic policy (geopolitical tensions, inflation, supply shortages)

Why would you ever want to throw all your eggs in one basket?

Imagine getting long crude oil futures on April 20,2020 and thinking buying crude at $1 was a no-brainer, only to find out that there was a “glitch in the matrix” which shoved prices down to MINUS $37.63 per barrel. 

Less disciplined futures traders will let small losses turn into big losers. However, there are strategies that can be implemented to try and avoid disasters.

How To Avoid A Big Trading Loss

One thing futures traders can do is consider trading with a stop.

(Disclaimer:  The placement of contingent orders by you, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders

A stop is an order which automatically triggers a sell once a specified price is breached.

During market panics, a stop-loss could save you from suffering further losses.

REAL ALSO | Stop Loss Orders Tips and Techniques | Plus Top 5 Stop Loss Strategies for Futures Trading

Another strategy which futures traders should consider is the use of options.

For example, let’s say you were long crude oil futures on April 20, 2020, the day prices went negative, if you owned a put option alongside the long futures contract, then you would have been hedged.

Review Your Game

Once you’ve figured out how to survive and not let one or two bad trades ruin your account—your next step is to identify winning setups, patterns, and strategies in the market.

Take the time to review your trades.

Ask yourself:

  • Why did I get into this trade?
  • What was my risk vs. reward?
  • Did my thesis play out?
  • Did I execute my plan?
  • How did I behave emotionally?
Understanding who you are as a trader, what your strengths and weaknesses are, and risk tolerance levels are—is essential if you want to make progress as a futures trader.

A lot of pros will use trading journals to keep track of their performance. Whether you decide on an old school notebook or an online journal, make sure you’re doing at least one.

Pay attention to your performance and start classifying your trades.

For example, are you making money on your day trading but losing on options?

The only way you can dig into your stats is by identifying and tagging your trades based on the setup.

Doing this will quickly allow you to identify your strengths and weaknesses.

The Mindset of Futures Traders

Did you know more than half of car accidents occur within a five-mile radius from home?

It’s true.

But what does it have to do with futures trading?

You see, there are a lot of futures traders who are disciplined a majority of the time, especially, when they need to be.

However, once they start stringing together a few winning days together, they start to get loose, and their discipline starts to drop.

Once we say to ourselves we’ve mastered trading and the markets, and that we don’t have to do anymore homework, guess what?

That’s when the market typically gives us the best spanking.

How many times do you need to hear it?

Past performance is not indicative of future results.

Who cares if you’ve won the last 9 out of 10 trades correctly, if you abuse the leverage and not position size correctly, one bad trade can wipe you out.

You should always come into futures trading with a beginner’s attitude and an open mind.

Of course, having the right mental framework is just the tip of the iceberg.

You also need to think about your operation.

  • How much time are you dedicating to your trading?
  • Is it worth it?
  • What if you reduced or increased your hours?
  • Are there any strategies/trades you should stop taking?
  • How much are commissions costing me?
  • Is there anything you should be doubling up on?
  • Are you executing your plan?
By staying humble and routinely checking in on your process, you’ll have a better chance of avoiding the issues which plague so many other traders.

Bottom Line

Taking losses in trading is part of the game. However, instead of discarding losses from our memory, it makes sense to examine all your trades, good and bad.

Why?

Because it allows us to discover more about our thoughts. You see, when there is money on the line, it’s not always easy to think clearly. But once we’re out of the trade, we can think a lot more logically. So by examining our losses we can learn a lot about ourselves and the actions we take.

The name of the game is always survival. To avoid big losses, try to stay diversified or limit your exposure to risk.

Study your trades and identify your strengths and weaknesses.  And of course, develop the right mindset which is conducive to winning in the futures market.

Trends change with the seasons, be prepared to move with the market or be left behind.

One way to make this process easier on yourself is with a futures trading broker that you can look at as a partner.

Optimus Futures caters to retail and institutional futures traders. As a discount futures broker, we offer competitive rates and margin requirements.

Plus, you gain access to our flagship Optimus Flow platform which includes all indicators, and automated trading journal, and a real-time news feed.

And you can get your account up and running in a matter of hours.

Click here to learn more.

Disclaimer: There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

Start the discussion at community.optimusfutures.com