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A survey of more than 500 experienced futures brokers asked what,
in their experience, caused most futures traders to lose money.
These account executives represent the trading experience of more
than 10,000 futures traders. In addition, most of these Account
Executives (AEs) have also traded or are cur rently trading for
themselves. Their answers are not summarized because different traders
make (and lose) money for different reasons. Perhaps you may recognize
some of your strengths and weaknesses. Yet many of the reasons given
are very similar from broker to broker. The repetitions stand to
demonstrate that alas, many futures traders lose money for many
of the same reasons. Perhaps these statements from experienced brokers
can make a contribution to you, and make this sometimes fickle,
often intricate, always interesting market place of futures trading
possible.
Here is what they said:
- Many futures traders trade without a plan. They do not define
specific risk and profit objectives before trading. Even if they
establish a plan, they “second guess” it and don’t
stick to it, particularly if the trade is a loss. Consequently,
they overtrade and use their equity to the limit (are undercapitalized),
which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
- Many traders don’t realize the news they hear and read
has, in many cases, already been discounted by the market.
- After several profitable trades, many speculators become wild
and unconservative. They base their trades on hunches and long
shots, rather than sound fundamental and technical reasoning,
or put their money into one deal that “can’t fail.”
- Traders often try to carry too big a position with too little
capital, and trade too frequently for the size of the account.
- Some traders try to “beat the market” by day-trading,
nervous scalping, and getting greedy.
- They fail to pre-define risk, add to a losing position, and
fail to use stops.
- They frequently have a directional bias; for example, always
wanting to be long.
- Lack of experience in the market causes many traders to become
emotionally and/or financially committed to one trade, and unwilling
or unable to take a loss. They may be unable to admit they have
made a mistake, or they look at the market on too short a timeframe.
- They overtrade.
- Many traders can’t (or don’t) take the small losses.
They often stick with a loser until it really hurts, then take
the loss. This is an undisciplined approach...a trader needs to
develop and stick with a system.
- Many traders get a fundamental case and hang onto it, even
after the market technically turns. Only believe fundamentals
as long as the technical signals follow. Both must agree.
- Many traders break a cardinal rule: “Cut losses short.
Let profits run.”
- Many people trade with their hearts instead of their heads.
For some traders, adversity (or success) distorts judgment. That’s
why they should have a plan first, and stick to it.
- Often traders have bad timing, and not enough capital to survive
the shake out.
- Too many traders perceive futures markets as an intuitive arena.
The inability to distinguish between price fluctuations which
reflect a fundamental change and those which represent an interim
change often causes losses.
- Not following a disciplined trading program leads to accepting
large losses and small profits. Many traders do not define offensive
and defensive plans when an initial position is taken.
- Emotion makes many traders hold a loser too long. Many traders
don’t discipline themselves to take small losses and big
gains.
- Too many traders are underfinanced, and get washed out at the
extremes.
- Greed causes some traders to allow profits to dwindle into
losses while hoping for larger profits.
This is really a lack of discipline. Also, having too many trades
on at one time and overtrading for the amount of capital involved
can stem from greed.
- Trying to trade inactive markets is dangerous.
- Taking too big a risk with too little profit potential is a
sure road to losses.
- Many traders lose by not taking losses in proportion to the
size of their accounts.
- Often, traders do not recognize the difference between trading
markets and trending markets.
Lack of discipline is a major shortcoming.
- Lack of discipline includes several lesser items; i.e., impatience,
need for action, etc. Also, many traders are unable to take a
loss and do it quickly.
- Trading against the trend, especially without reasonable stops,
and insufficient capital to trade with and/or improper money management
are major causes of large tosses in the futures markets; however,
a large capital base alone does not guarantee success.
- Overtrading is dangerous, and often stems from lack of planning.
- Trading very speculative commodities is a frequent mistake.
- There is a striking inability to stay with winners. Most traders
are too willing to take small profits and, therefore, miss out
on big profits. Another problem is undercapitalization; small
accounts can’t diversify, and can’t use valid stops.
- Some traders are on an ego trip and won’t take advice
from another person; any trades must be their ideas.
- Many traders have the habit of not cutting losses fast, and
getting out of winners too soon. It sounds simple, but it takes
discipline to trade correctly. This is hard whether you’re
losing or winning.
Many traders overtrade their accounts.
- Futures traders tend to have no discipline, no plan, and no
patience. They overtrade and can’t wait for the right opportunity.
Instead, they seem compelled to trade every rumor.
- Staying with a losing positien because a trader’s information
(or worse yet, intuition) indicates the deteriorating market is
only a temporary situation can lead to large losses.
- Lack of risk capital in the market means inadequate capital
for diversification and staying power in the market.
- Some speculators don’t have the temperament to accept
small losses in a trade, or the patience to let winners ride.
- Greed, as evidenced by trying to pick tops or bottoms, is a
frequent error.
- Not having a trading plan results in a lack of money management.
Then, when too much ego gets involved, the result is emotional
trading.
- Frequently, traders judge markets on the local situation only,
rather than taking the worldwide situation into account.
- Speculators allow emotions to overcome intelligence when markets
are going for them or against them. They do not have a plan and
follow it. A good plan must include defense points (stops).
- Some traders are not willing to believe price action, and thus
trade contrary to the trend.
- Many speculators trade only one commodity.
- Getting out of a rallying commodity too quickly, or holding
losers too long results in losses.
- Trading against the trend is a common mistake. This may result
from overtrading, too many day trades, and undercapitalization,
accentuated by failure to use a money management approach to trading
futures.
- Often, traders jump into a market based on a story in the morning
paper; the market many times has already discounted the information.
- Lack of self-discipline on the part of the trader and/ or broker
creates losses.
Futures traders tend to do inadequate research.
- Traders don’t clearly identify and then adhere to risk
parameters; i.e., stops.
- Most traders overtrade without doing enough research. They
take too many positions with too little information. They do a
lot of day trading for which they are undermargined; thus, they
are unable to accept small losses.
- Many speculators use “conventional wisdom” which
is either local, or “old news” to the market. They take
small profits, not riding gains as they should, and tend to stay
with losing positions. Most traders do not spend enough time and
effort analyzing the market, and/or analyzing their own emotional
make ups.
- Too many traders do not apply money management techniques.
They have no discipline, no plan. Many also overstay when the
market goes against them, and won’t limit their losse
- Many traders are undercapitalized. They trade positions too
large, relative to their available capital. They are not flexible
enough to change their minds or opinions when the trend is clearly
against their positions. They don’t have a good battle plan
and the courage to stick to it.
- Don’t make trading decisions based on inside information.
It’s illegal, and besides, it’s usually wrong.
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