Weekly Insights: The Single Most Important Aspect of Futures Trading

The Single Most Important Aspect of Futures Trading


Okay, traders, here is a question: What is the most important aspect of successful futures trading? Is it identifying the trading opportunity? Is its proper entry into the market? Is it the trading tools you are using? Is an exit strategy the most important aspect of trading? The answer is none of the above (although an exit strategy is close).

The most important factor in successful futures trading is money management. One still must be savvy at chart forecasting and/or fundamental analysis, but the money-management factor will make or break a futures trader. The huge leverage involved with trading futures absolutely requires pinpoint money managing.

Over the years, I have listened to the best traders in the business talk about what makes them succeed in this challenging arena, and nearly everyone emphasizes the importance of sound money management. A few years ago, I attended a TAG (Technical Analysis Group) trader’s conference in Las Vegas. One of the featured speakers stressed that becoming a successful futures trader should be more an act of survival in the early going than scoring winning trades.

Even a rookie trader who starts out with a hot hand will eventually find that at least some trades are not going to go his way. And if he has not employed good money-management principles on those losing trades, he will likely have squandered his trading profits and his entire trading account.

Conversely, the novice trader who uses good, conservative money management techniques will be able to withstand some losses and be able to trade another day. The ability to take a loss is the key to survival —and ultimate success — in the futures trading arena.

Here is an important point to consider regarding money management and successful futures trading: Most successful futures traders will tell you that during the span of a year they have more losing trades than winning trades. Why then are they successful? It is because of good money management. Successful traders set tight stops to get out of losing positions quickly, and they let the winners ride out the trend. On the balance sheet, a few bigger winning trades will more than offset the more numerous smaller losers. Good money management allows for that to happen.

“Good money management” is a relative principle. A good money-management practice for one trader might not be a good money-management practice for another. Here is a real-life example: I had a fellow email me a while back, saying he was up $3,000 in a sugar trade, and that his total trading account was $4,000. Although I do not provide specific trading advice to individuals, I told the trader that if I had only a $4,000 trading account and had racked up $3,000 in profits on one trade, I would seriously think about ringing the cash register on that trade and building up my account so that I could withstand those drawdowns and losers that will eventually occur.

On the other hand, if a trader with a $30,000 account had a $3,000 winning sugar trade, he may want to let the winner ride a little longer, since pocketing the profit would not nearly double his trading account, as it would the smaller-capitalized trader.

In other words, do not be a greedy trader. There is an old trading adage that says there is room for bulls and bears in the marketplace, but pigs get slaughtered.

Let me emphasize that there is nothing wrong with starting out with, or keeping, a smaller-capitalized futures trading account. But I strongly suggest that those smaller accounts use the very strictest of money management.

Dozens of good futures and stock trading books are available, and most spend at least an entire chapter on money management.

Here are just a few very general money-management guidelines:

  • For smaller-capitalized traders, do not commit more than one-third of your trading capital to one trade. For medium- and larger-capitalized traders, you should not commit more than 10 percent of your capital to one trade. The guideline here is, the larger your trading account, the smaller your commitment should be to one trade. In fact, some trading veterans suggest larger trading accounts should not commit more than 3-5 percent of their capital to one trade. Smaller-capitalized traders, by necessity, must commit a larger percentage of their capital to one trade. However, these small-cap traders may want to trade options (buying them, not selling them), as risk is limited to the price paid for the option. Or smaller-capitalized traders may want to trade smaller-sized contracts.
  • Use tight protective stops in all your trades. Cut your losses short and let the winners ride the trend.
  • Never, never, never add to a losing
  • Your risk-reward ratio in a futures trade should be at least three to one. In other words, if your risk of loss is $1,000, your profit potential should be at least $3,000.

I cannot stress enough that survival in the futures trading arena (especially for beginners) should be your top priority.


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