Part 1: Avoiding The Common Pitfalls Of A Futures TraderProvided By Ultimate Trading Systems How a futures trader can Maximize their ProfitsMost markets have predictable trends and repeated patterns. Why? Because most things that happen in the markets are a results of the motivations of the futures traders in those markets. Many people say that what drives most markets are greed and fear. Greed makes people buy, and fear makes them sell. Greed and fear can actually benefit a futures trader: Greed, or at least the desire to make money, is why we trade in the first place. Fear is a healthy response when we sense danger or disaster closing in, and it motivates us to get out of a bad situation. But when they get out of control, greed and fear are two of the basic psychological pitfalls that can make a futures trader fail. A Futures trader who consistently makes mistakes usually do so for a couple of reasons. Excessive Greed and the Futures Trader The desire to make money is what motivates one to become a successful futures trader in the first place. But the desire to succeed is different from trying to get every possible profit from a trade. This kind of reckless greed makes a futures trader hold on to their positions long after the downside has started to outweigh the upside and risk outweighs potential reward. Here's an example: a futures trader sees that a particular stock is starting on a run; it's reported good news and is already up 20% for the day; the volume is still building; it's stable at the current price; the market is rallying strongly; and it looks like it will go higher. The futures trader buys 1,000 shares at $6 a share. By 12:15 P.M., the stock has raced up to $10 a gain of over 66 percent for the day, and a profit of $4,000 on 1,000 shares. The futures trader knows that round number price points, like 10, are psychological barriers for a futures trader, and that if a stock is going to stop rising, it will probably be near a point like this. As it turns out, after momentarily shooting to $10.03, the price stops rising and starts to go down. The futures trader knows that he should sell now and re-buy later, but he keeps thinking, What if it goes to 12 before it stops? What if it makes a 100% gain? How will I ever forgive myself for missing out on another $2,000 profit because I sold too soon? So, of course what ends up happening is that the futures trader finds that his stock has dropped down to $9.50 and then $8.75, ending the day at $8.90. The next day the market opens down and the futures trader is lucky to get out at $8.70, down $1,300 from the profit he could have had. The way to get around the lure of excessive greed is to take profits consistently. It doesn't matter if the stock goes up another dollar or two after you're out of the position. The important thing is that you've made a clean profit and are ready to go on to the next trade with even more capital than you had before. And going on to the next trade is better than staying in the old one once it's gotten too risky, because the next trade will have an upside that outweighs the downside. (If it didn't, you wouldn't have any reason to get into the position in the first place.) The old trade's downside has begun to outweigh any further gains you're likely to make. What should you do?
copyright 2005 Futures Trader
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