Futures Trading Lessons | Confessions of Unsuccessful Traders

Confessions of Unsuccessful Futures Traders & The Lessons You Can Learn From Their Mistakes


This article on Futures Trading Lessons and Mistakes is the opinion of Optimus Futures.

futures trading lessons

  • Do not fear mistakes. Use them to fuel your trajectory of improvement.
  • Successful futures traders may vary in approach, background, knowledge, and capital, but they do have one thing in common, they have made plenty of futures trading mistakes.
  • When you do make mistakes, try to “fail small,” so that no matter how frequently you fail, it will never bring you to the risk of ruin.

Have you seen the 2003 disaster film The Core? In a nutshell, the earth’s core stopped rotating. Without rotation, the earth’s magnetic shield is shot, threatening human life with the prospect of extinction as solar radiation roasts the planet. A handful of brave scientists must travel to the planet’s core in an attempt to get it spinning again.

Before they travel to the center of the earth, Col. Bob Iverson (Bruce Greenwood) and Maj. Rebecca Childs (Hilary Swank) engages in a discussion about “leadership” and the importance of failure over winning. Here is an abridged version of the script (italics mine).

Col. Robert Iverson: Being a leader isn’t about ability. It’s about responsibility.

Maj. Rebecca Childs: Got it, sir.

Col. Robert Iverson: No you don’t, Beck…You’ve got to be ready to make the shitty call.

Maj. Rebecca Childs: What makes you think I’m not?

Col. Robert Iverson: Because you’re so damn good….It’s just you’re used to winning… and you’re not really a leader until you’ve lost.

We are not the first to compare the mindset of a day trader with that of a fighter pilot. Lots of differences indeed, but enough similarities to justify the analogy. But let’s not get into all of the comparison points right now and just focus on one area: mistakes, failure, loss.

There is not one seasoned trader who has not experienced all three. Some have blown up their accounts, others have not. Regardless, all have failed at one point. Better yet, all have found a way to make failure a part of their progress–the cliches “failing forward” and “failing fast.”

The difference between a successful and unsuccessful trader is that the latter either never learns the lessons that failure presents, or s/he continues to repeat the same mistakes.

Don’t be that trader.

We’re going to present a composite of real traders’ experiences in order to focus on seven common swing and day trading mistakes that traders often make (hopefully just once) and the lessons that the painful consequences can teach us.

Futures Trading Mistakes:  #1 – Choosing a Platform Based Not on Trading Strategy But on Its Bells and Whistles

There was this day trader whose trading approach entailed higher-than-average frequency but with low volume-per-trade. He traded no more than 10 contracts at a time, but the time between trades varied from seconds to a few minutes. Without a doubt, he needed a fast platform. But he didn’t require colocation, and he certainly didn’t need the fastest platform on the retail market.

His monthly platform and co-location fees cost him a little over $700 per month (this was over a decade ago; current costs are much lower). Regardless, the “edge” that his platform offered didn’t kick in until he put on a position size of over 50 contracts “per trade.” He never did this; his account was too small. Beyond that volume, the platform exhibited less slippage than other relatively fast platforms. Also, co-location at that volume would likely give any high-volume trader a speed advantage.

In the end, the $700 per month significantly eroded his profits (when he made them). Sadly, he could have traded at the volume and frequency that he regularly did without co-location and with a simpler platform that wouldn’t have compromised his order routing speed.

The kicker was that the alternative platform was offered by his brokerage at no cost. What he did was almost analogous to renting a high-speed racing car to drive to the grocery store at a speed of 30 mph. It was completely unnecessary, and after a year of paying over $700 per month, he realized that money could have been put to much better use, in and out of the futures market.

Lessons that Successful Futures Traders Learn:

  • Don’t pay for any extra features that have no relevance to your trading strategy.
  • If a platform has multiple functionalities, consider the percentage of functionalities you’re actually using. If you’re not using it, you shouldn’t have to pay for it.
  • When it comes to selecting a trading platform, make sure it’s customized and minimized to suit your strategy (not the other way around).
Optimus Futures View: Take a look at our platform Optimus Flow. It’s Free, has the ability to trade from the DOM, charts, and can trail targets: https://optimusfutures.com/OptimusFlow.php

Futures Trading Mistakes: #2 – Focusing on Commissions Instead of Service

As a self-directed trader, you are technically on your own. Ideally, you would work with a brokerage that’s almost 100% automated, as you’d have no need for information beyond what you already know. These services are available. But most traders would not work with such brokerages. Those that do often regret it. Because the real world and the real market is much less forgiving, perhaps even punishing, to those who go into the market with less-than-professional knowledge and experience.

And that is why we have brokers. Brokers who care solely about trading volume compete on commissions. Those who care about clients compete on quality of service. The higher the quality, the more time spent helping a client, the higher the compensation.

There was this client who nickel-and-dimed brokers to get the lowest possible commission. She settled for opening an account with a clearing firm (FCM) instead of working with an IB (Introducing Broker). She figured there is no point in paying extra when she can go directly to the FCM.

The problem was that most of the FCM’s clients were large institutional traders. When she would trade thousands in volume, the larger clients traded in the millions. So, when she needed help with a platform, or with understanding a few exchange policies affecting her trades, the broker did not even remember her name, let alone give her the help she needed. And why should the broker help? Time spent on small clients takes away revenue opportunities with larger ones.

Another trader opted for a small and cheap clearing firm. This clearing firm had relatively low overhead due to a small workforce. When another client went into a debit situation, overnight, the smaller clearing firm did not have 24-hour order desk staff at hand. The client lost tens of thousands in his overnight trade. Many clients lost money overnight. All due to an understaffed firm. However, over the course of the year, the clients did save a few cents every trade. But what good was that now?

Lessons that Successful Futures Traders Learn:

  • Unless you have as much industry knowledge as your broker, do not try to go it alone to shave a few cents off your trading costs. You may end up regretting it in the long run.
  • If you expect quality service, then pay your broker her or his fair share; “fair share” is negotiable, so negotiate–but remember the cliche that holds true…”you get what you pay for.”

Optimus Futures View: We provide a flexible commissions schedule based on your trading activity: https://optimusfutures.com/Futures-Trading-Pricing.php

Futures Trading Mistakes: #3 – Asking for Too Much Margin

The following is a true and a well-publicized story that became something of a minor scandal for a major investment firm. We will refrain from giving actual names. But if you have been trading for some time, you might have heard the story.

A fund manager from a world-renowned investment firm opened an account at a small brokerage, contrary to his firm’s restrictions. His account was relatively large–around a million dollars. He demanded exceedingly high leverage, only a fraction of your standard day trading margins. After negotiations with the clearing firm, the broker approved his request, given the volume this client was about to trade.

The fund manager traded with such large positions that each “tick” moved over a thousand dollars. And several ticks can move for or against you in milliseconds.

One day, the market he was trading moved against him, too rapidly to unwind. The first million in his account got leveled in a matter of minutes. But then, the market accelerated too quickly for the manager to log into his platform and close everything out (he was busy at work, managing “other” people’s money, while his own account was diving sub-zero). Fortunately, the brokerage’s risk desk liquidated his entire position.

Lessons that Successful Futures Traders Learn:

  • If you plan on “gambling” far more than you own, note that this kind of risky behavior will eventually get its reckoning. If you go through with it, you are no longer a trader, but a gambler. Hint: It is much more enjoyable to lose your money in Vegas, as you get free parking and cheap drinks.

Optimus Futures View: We can alter your day trading margins based on your experience, risk tolerance and risk capital. Here are the margins our clearing forms provide: https://optimusfutures.com/Margin-Rates.php  (you can always ask for an increase in day trading and overnight margins to avoid over-leveraging your account).

Futures Trading Mistakes: #4 – Paper Trading for Too Long

Have you ever been a demo millionaire? I have. It is easy. Some platform simulations are so “loose” that you can hit the closest bid and ask and make $10,000 in a matter of hours. But try that in a live market and you are destined to ruin.

I once knew a trader who learned a few useless things from a well-known “trading school.” He practiced trading day-in and day-out until he perfected his strategy. He profited consistently for six months using a seemingly fail-proof strategy. Finally, she let loose on the live market. She even ran a simulation alongside her live trades–the simulation running her strategy algorithmically; she, trading it live manually.

At the end of the day, here demo made over $1,000. Her live trades lost her $1,500. If she had traded her strategy live in the first month, it might have told her that something was deeply wrong with it. It would have saved her 6 months of “training.” And training for what…losing money?

A Step by Step Guide on How to Take Your Futures Trading Strategy from a Demo Account to Live Trading

Lessons that Successful Futures Traders Learn:

  • Demo profits do not count.
  • The live market will validate your simulated strategy, not the other way around.
  • Unless you test your trading skills in a live market, you are simply “gaming.” And there are plenty of mobile phone trading games to play for free.

Futures Trading Mistakes: #5 – Underestimating Your Emotions When Trading Real Money

The benefit of “forward testing” where you’re able to look at the market bar by bar is that you can get a sense as to how you might feel if you had come across that opportunity in real life. Maybe the trade looked too risky to take or too promising to pass up. The results will often surprise you.

But no forward test can ever put you in the driver’s seat when risking your hard-earned cash. What seems obvious in retrospect can seem obscure and frightening when real money is on the line.

Many clients will leave the market, heads down with tails tucked under their legs, thinking to themselves, “my trading psychology needs work.” Maybe they were biting off more than they can chew in terms of risk (meaning, the smaller the position, the less stress they might have experienced). Maybe they were trading poor strategies and just did not know it. Or maybe, their emotions just got the best of them.

Dip your toe into the live market. Only then will you know what it is really like to risk money.

ALSO LISTEN | Small Mistakes Versus An Avalanche of Trading Errors 

Lessons that Successful Futures Traders Learn:

  • Your emotions will tell whether you are trading too “large,” uncertain about your strategy, or not cut out for a given “style” of trading.
  • Whatever it tells you, listen to it, and try to figure out what it’s telling you other than the fact that markets are risky (you can learn a lot from your emotions if you listen to them).

Futures Trading Mistakes: #6 – Being Easily Swayed by News and Opinions

It is hard enough to figure out whether a market is driven primarily by sentiment or by fundamentals of which you may not yet be aware. Add news-driven sentiment to the mix and now you have added yet another layer of uncertainty to your trading.

If you are not a so-called “news trader” looking to capitalize on short-term shocks based on information that may or may not alter the longer-term fundamental situation, then you shouldn’t be swayed by short-term news or opinion.

This is different from being aware of the longer-term fundamentals, which can inform your big picture view. And it is certainly not the same thing as anticipating a major economic report (like the Jobless Claims released every Thursday, the quarterly GDP report, or monthly FOMC announcements). We are talking about media opinions and sudden news releases.

Chances are, you are a technical trader. So, stick with your technical system, but be aware of the fundamental environment surrounding your market. For instance, you may have been trend-following the S&P 500’s recovery since March despite constant reports on how the market sentiment has unpegged from the economic fundamentals that are supposed to be driving the market.

If so, any reports from media pundits to major banking institutions on the irrational exuberance of the investing public might have easily distracted you from your technically driven bullishness. You might have sold, or worse, sold short, as we have seen rally after rally.

Lessons that Successful Futures Traders Learn:

  • In the end, your system is what should determine your trades.
  • Others’ opinions should not matter.
  • ..you had better be following a sound strategy. Otherwise, your chances of success might be as good as getting distracted by the news–which is to say, not good at all.

Futures Trading Mistakes: #7 – Spending Too Much Time Looking for Something Better

The subtitle for this section is “Not Focusing Enough on What Works or What One Does Well.”

Here is a classic scenario that I personally witnessed. A client sifted through several algorithmic trading systems to settle on five that have shown relatively consistent positive “real” returns. She subscribed to one that appeared to be outperforming the others. As soon as that system hit a drawdown, fearing that the system may no longer be performing up to its historical standards, she jumped to another top-performing system, only to catch another drawdown. After having the worst luck in all five systems, she started subscribing to other systems, only to catch more drawdowns.

In the end, she had no more capital to invest in even a single system. All of the original five algorithmic systems yielded positive returns at the end of the year. Yet, her risk capital was depleted.

Another classic scenario. A client whose performance yields very little promise decides that perhaps what is needed is a better indicator. Instead of focusing on the technique, he focused on bells and whistles in hopes of finding a silver bullet. He eventually mastered several tools, but he never mastered his craft–the most important thing, second only to making real money in the market.

Lessons that Successful Futures Traders Learn:

  • There is no secret formula, no ultimate indicator, no loss-proof system.
  • Your craft defines your tools and not the other way around.
  • The best traders don’t seek the “perfect” methodology, but rather the simplest and most effective way for them to make money (and that will differ from trader to trader)–in short, Keep It Simple Stupid (KISS).

The Bottom Line

You will eventually make plenty of day trading mistakes. Learn from them. That is what successful futures traders do. You should too.

ALSO READ | 5 Behavioral Traits of Successful Futures Traders

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

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