2 Steps to Profitable Futures Trading

Do you want to know why traders love futures trading? They can't lose!

I know that sounds unbelievable... and I'm not saying that you'll never have losing trades, what I am saying is that in the long run losing in futures trading can be dramatically reduced if traders would simply adhere to two simple trading rules:

Now before I tell you about them I have to caution you that you may not like them... in fact you've probably even heard them before... and if you have, I hope you take that as a testament to their importance. The reason I want to preface this is because I KNOW that people hate to hear it, but it is this same knowledge that professionals take and apply that make them the professionals they are. Now the 2 guidelines I want to share are:

1 - Have sufficient trading capital
2 - Use (and never abandon) stoploss orders

While you don't need tons of money to be successful in trading, you should have enough to sustain the invariable loss. To give you an idea of how much you should have, always consider having (at minimum) 10x your average loss.

If your stop-loss orders will usually exit you from the market with a maximum $500 loss on the trade, then you need at least $5,000 total trading capital. (Hey, if you can't pick one winner out of ten trades, you need more help than I can provide you with.) If your average risk/potential loss is closer to $1,000, then you should have about $10,000 of trading capital.

Another trader I knew advised me that the total loss on three consecutive losing trades should never be more than 1/3 of your trading account. So if on average you were risking $1,000 per trade, then 3 losing trades would add up to $3,000, suggesting a starting account of at least $9,000 to $10,000.

Let me sum up the lesson of trading capital with this very important truth about futures trading - Losses are part of the game. Futures trading is speculation. No one (at least no one I've ever met anyway,) speculates with perfect accuracy. But the beautiful thing about futures trading is that you don't need to trade perfectly - you can be quite successful even if you're wrong more often than you're right... as long as you always manage your risk.

That brings us to our 2nd point - Always use stoploss orders. Now I don't have any actual stats to back me up here, but from my own trading results, as well as from those I've witnessed from clients and peers, I'd wager that 90% of accounts were wiped out because someone "fell in love with" a trade, and instead of taking a calculated loss, people pulled their stoploss, and stayed in a trade hoping it would eventually go their way... unfortunately this usually ended bankrupting their trading account.

I've seen it happen quite often - and certainly more times than I care to think about. Let me make this very simple - Never cancel a stop-loss order. Never. Believe me, when a market is close to stopping me out, I can always manufacture at least a dozen "good" reasons to cancel or move my stop. The only problem is they aren't really good reasons - I'm just wanting them to be. They're merely rationalizations devised to give me hope that I was right, when the market is clearly indicating that I was wrong. Take your losses; take them early; take them when they're cheap and relatively painless. There's no shame in being wrong in your judgment about a market. The only shameful part is being unwilling to change when you were wrong, and stubbornly clinging to a bad trade.

Halston Adams is a retired futures broker who learned the keys to producing impressive returns by studying successful traders. Find out more about his trading approach at: 100% Gains today.

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