This article on How to Become a Professional Futures Trader is the opinion of Optimus Futures.
Every person who has the gumption to enter the world of commodity futures trading does so with more than just an ounce of ambition. Sure, there are a handful of wealthy investors who can afford to apportion a very small percentage of their portfolio to futures and alternative investments, but this class of investor doesn’t represent the typical “retail” futures trader, the “smaller” speculator who often has much less starting capital, and potentially much more to lose.
This article is for the vast majority of retail futures traders who are just getting started, hoping to grow a relatively modest amount of capital into a consistent stream of income. This piece focuses on those dedicated traders, many of them newbies, who want not only to learn how to trade futures, but who also want to rise up in the ranks of their own personal standards from dabbler to serious trader to independent professional.
From Dabbler to Independent Pro
It’s a tough journey. Anyone can dabble, but within that stage of “dabble-hood” are the opportunities to understand the necessary challenges and skills that transform a dabbler into a more serious trader. Serious traders, those who approach trading futures as a craft and discipline, may be content to stop at that level. This is a stage where one can make supplemental income similar to the returns of the small investor. However, it is the final stage of independent pro that most traders want to reach, and it is similar to that of the serious trader, but with one critical difference, which we’ll subsequently cover.
So, let’s get started with our overview of this entire “evolution.” Let’ begin with the first stage, trading degree zero, the stage where learning how to trade should be accompanied by parallel developments in learning how not to trade: the dabbler.
The Dabbler – Trading as a Hobby
As with the opening steps of any discipline, the dabbling stage can sometimes be the most exciting part of the process. It can also be the most overwhelming, perhaps even the scariest, though the sheer excitement of learning and the recognition that trading futures can potentially offer a much better (and different) “future” is usually enough to overcome any negative sentiment toward fear, risk, and loss.
Think of this as a “honeymoon” phase, as strange as that may sound. It’s an exciting new world filled with experiences you have yet to encounter, skills you have yet to acquire, and a vast body of knowledge through which you must sift, finding nuggets of gold in the process. Things may not go well at first, but that’s to be expected (just as long as you don’t blow out your account and go debit, wherein you proverbially lose your shirt, your house, your spouse, or nature forbid…even your dog).
Trying Different Approaches vs Testing Different Approaches
At this stage, you’ve probably learned different ways to trade the markets. Most likely, your approach is technical in nature. It isn’t uncommon to have “studied” at least three to five different approaches. Maybe you learned these from a book or a video. Perhaps you feel confident in these approaches because the materials from which you learned supplemented the trading approach with a historical set of stats (e.g. win/loss ratio, percentage return, profit factor, etc.).
- Whatever you’ve learned during this part of the process, remember that there’s a difference between theory and practice and more importantly, there is a huge difference between “simulation” and “live trading.”
- Don’t take any presented futures trading stats at face value: they may be based on hypothetical models, or if they are taken from live trades, the market conditions surrounding those trades might have changed or may not represent a sufficient history that might bring out the flaws of that approach.
- When trying different trading approaches, it’s about learning as much as you can; when rigorously “testing” systems, it’s about unlearning, discarding, or modifying most of the knowledge you had accumulated.
Discerning Luck from Skill
Maybe you’ve experienced “beginners’ luck.” You’ve made a few thousand dollars on your first trade. Was it your method or was it luck? Can you repeat it consistently? Often, many beginning traders can’t, but when they don’t, they often lose big.
There’s an old Sun Tzu maxim from The Art of War that I’m about to alter a bit to fit our context: you can’t force a win, but you can make yourself robust enough not to get ruined. It’s like a game of offense and defense. There are times your approach might win the day. Other times, your money management might win the day.
Many beginners approach futures trading like newbie chess players: they launch an aggressive offense only to neglect their positional development or solidify their defenses. Ultimately, they end up overextending themselves, forced to watch as their positions get dismantled. In trading, without proper money management, your account can easily get “dismantled” in one quick stroke.
- It’s not enough to set a risk limit (i.e. R%) for one trade (amount of futures trading contracts may vary on your base capital); set it for all expected trades within a session, week, or month. Example: If you risk 2% of your account, and you have only $5,000 in your account, you should ask yourself: Can I trade the total number of trades my approach generates on a daily, weekly, or monthly basis? And if so, for how long can I continue trading should my approach generate an extended losing streak?
- A money management strategy is just as important–if not more so–than your futures trading strategy.
- If you are able to generate profits on a consistent basis, you won’t know for certain if your profits are attributable to luck or skill (e.g. those who are able to profit off a basket of stocks during a bull market are not necessarily brilliant investors).
- But if you are able to preserve your capital through a string of bad trades, unfortunate circumstances, or unfavorable trading conditions, then your capacity to weather the storm of bad luck might be attributable to skill.
Learn How to Test, How to Test the Test, and How to Test the Tester
Although simulated online trading, back testing, and forward testing results can be supported or wiped out in a flash by consistent live-market testing, simulated trading and all its variants are probably the closest you’ll ever get to a live market experience. It may be far from the real McCoy, but without it, what else have you got? Therefore, testing is a critical part of the trading process.
But more importantly, the art of testing itself is also an acquired skill, and this is an important realization that many new traders tend to miss. Let’s go through a few examples, starting with backtesting.
>> Backtesting: So maybe your trading platform has a backtesting functionality. You develop a system that, according to the test, has had a 75% win rate (generates profits 75% of the time), with a profit factor of 3:1 (very loosely, let’s say this means that it wins $3 for every $1 lost) for the ES over a `12-month period. Good system? Check again. You test it for a three year period (manually, on a spreadsheet, because your platform may not have that much data). Your win rate goes down to 65%, profit factor at 2.75:1; still good. Then you test it for 5 years–win rate goes down to 51% with a profit factor of 2.5: 1. Finally, you test it for an entire decade. Win rate goes down to 45% but the win rate is 2.25:1. Still a good system, but far from your original assessment.
>> Forward testing: Fortunately, you are able to forward test the system. You go back to 2009 and move forward bar by bar, trade by trade. In the end, your win rate is down to 35% and your profit factor is negative. You ended up with losses. Why? Because when confronted with each current bar, unable to see what’s up ahead, you didn’t follow the rules. Why not? Some trades that didn’t look promising (and that you didn’t take) ended up being winning trades; and trades that looked like winners, that perhaps you doubled your position on, ended up big losers. In short, you didn’t stick to your system. This may seem easy, but wait until you actually try forward testing yourself. You’ll see what I mean.
Knowing how to test and how to analyze the conditions of each test is often just as important as the testing itself. When testing a system, it’s just as important to test the systems as to test the evaluation and the “evaluator” (that’s “you”).
- When backtesting, use the largest possible data sample that you can find. Often you’ll find that even the most impressive stats will “average out” toward 50/50, at which point you can evaluate whether its attributes still show promise or not.
- Simulated trading via “demo” is fine, but forward testing may better reveal your tendencies (and flaws) as a trader, particularly if your forward testing platform will not reveal data beyond the current bar.
- Learn how to interpret the various statistical figures presented to support (read: promote) a given trading methodology–approach it with skepticism, as the data may often reveal potential flaws, something we will discuss in Part II of this post.
Failure is Not a Marginal Byproduct but a Growth Source
In this stage of trading, you will be making more mistakes (hopefully) than you will in the later stages. Naturally, this is the stage where you are the least aware of what you are actually doing.
If you confine your mistakes to a simulated environment (as many new traders spend more time on a demo than in the live market), then be aware that you may be developing expertise as a “demo trader” but not as a real trader. If you cannot afford to trade the live market, then you may want to reevaluate your method or amount of risk capital (or both).
The Main Points:
Everything in this stage of trading is about separating the illusion from the reality of trading futures, the theory from the practice of speculation, simulated from live market performance.
This stage is also about failing frequently in order to fail forward.
For those who can glean critical insight while going through this early stage, and this applies to the live market as well as a simulated environment, they may find themselves moving toward the second stage of becoming a “serious trader.”
Those who cannot may be consigned to remaining “dabblers.” And by remaining a mere dabbler–one who will likely not move on to a more sophisticated level of trading–not only might you be wasting your time and money, you may also be missing out on other non-trading opportunities (such as conservative investing or simply “saving” your money in a bank account) that may provide a better financial future.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.