Weekly Insights: Beware of “Maybe I Should Just do the Opposite?”
Beware of, “Maybe I Should Just Do the Opposite?”
Anybody who makes the pitch that trading futures is a sure-fire ticket to “Easy Street” is either way out of touch with reality, or a scam artist out to take your money. Success can be achieved in this fascinating business — but it is not easy folks. It is not easy for the less-experienced traders, and it is also not easy for the professionals.
As I was thinking the other night about what I was going to write for my latest educational feature, I thought about the number of people through the years who have jokingly (and sometimes seriously) said to me, “Maybe I should just take the exact opposite trading position that I had planned.” Think about it. At first blush, that seems not to be such a silly idea. Indeed, if most traders have more losing trades than winning trades, then it seems that if they just did the opposite, they would have more winning trades than losing trades, right? Wrong. Here is why:
The reason futures trading is difficult is because of the high degree of leverage involved in trading futures. You can be right in your determination of market trend, but if the market does an unexpected “hiccup” during the trend — as it often does — then you could be stopped out of your position for a loss. These hiccups can be unnerving and frustrating to traders, but they are only very small blips in the overall scheme of the market’s price structure. Let me explain by providing you with the following example. Most traders would agree that a 25 cent daily trading range in corn is large. However, that is less than a four percent fluctuation in the overall price of the commodity. It is the high leverage the futures trader accepts that makes this type of move seem so large. Remember, for a small amount of margin money, a corn trader is responsible for a corn futures contract that is worth over $35,000.
Some may ask: “Then why use stops? Why not let those hiccups play out and the market will eventually trend in the direction you anticipated? Again, if only trading futures was that easy. If traders opt not to use protective stops, they are inviting big drawdowns on their trading accounts, amid the hope that prices will eventually turn in their favor. That is not a good situation for most traders. Cutting losses short is a much better alternative.
However, I do know a few traders that have made very long-term trades with no protective stops. These traders know that their drawdowns can be steeper, but they plan on waiting out the markets for their anticipated moves. These traders have well-defined trading plans, and they cannot be faulted, even though most traders do not employ such trading plans.
I also want to share with you another phenomenon that I quite often see in analyzing and trading futures markets: When nearly everyone agrees on the likely direction of a particular market trend — even the experts, watch out. The U.S. Treasury bond futures market a while back was a classic example. One winter, every one of the trading advisors I followed indicated a near-term bearish stance on bonds. Guess what happened? The T-Bond market trended higher. The markets are always right, and even the best traders and analysts in the business are tripped up more often than they like to admit.
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