Retail traders have a tendency to watch too many markets. They want to be involved with gold, oil, S&P 500, cocoa, lumber, euro, and so on, all at one time. This is counterproductive. Their reasoning is that they don’t want to miss anything. They simply do not see the material difference between gold and lumber or the euro and the yen. They are all interchangeable when it comes to opportunity.
Two problems arise when speculation is approached in this way. The first is that not all opportunities are created equal. By approaching gold the same way you approach wheat, you are ignoring several key factors. There is a difference in leverage, difference in fundamental factors, and a difference in volatility that affects each market.
The second problem is that you will miss opportunities by trying to watch everything at once. Computers have changed the life of the trader tremendously. Each trade setup can be programmed and the trader can be alerted to the setup. Unfortunately, as often happens, by the time you are alerted to the activity the move is underway and you are effectively chasing the market. Or you can be faced with too many choices, with little chance of discerning which one will actually take off and which one will not. This type of trade cherry picking can be frustrating and adds another layer of decision making that can cause trading hesitation.
The professionals that trade in the pits of the corn market only trade one thing and one thing only: corn. The professionals that trade in the pits of crude oil options only trade crude oil options. Many of them successfully earn a living focusing on one market. This can be replicated by retail traders. By focusing on one market, retail traders go from being just a trader to a euro trader or a wheat trader or an oil trader.
By becoming a market-specific trader you liberate yourself. Much like your current (or former) profession, there are trade journals, conferences, magazines, and seminars designed for these specific industries. Each is a fount of information that can give you fundamental knowledge and “public” industry secrets that you would not have access to as an average trader following a few signals.
Couple this additional knowledge with the prescient ability to understand a market’s rhythm, solely because you trade it exclusively, and you then begin to approach the same level of market savvy that professionals have. From this level of trading comes the ability to choose a day, swing, or position trade depending on the market’s needs, not your own.
Buy or Sell Side Specialist
Who says you have to buy and sell? While it is easy to become caught up in buying stocks, few people ever short stocks. Many stock investors that come to futures or forex trading go to the extreme: they simply buy and sell too much. Since longs and shorts are treated the same when it comes to futures and forex, it is easy to get whipsawed in and out of positions.
If a trader finds himself losing money in his long position, they he may go short; if the short position is losing money, he then may go long. There are no rules against this activity and what many traders find themselves doing is chasing the markets. This constant chase generates commissions for the brokerage, not necessarily profits.
Not all signals are created equal. In a long-trending market, is shorting the best thing to do? In a short trending market, is buying the best thing to do? By limiting trading activity to the market’s most probable direction, you can develop a laser-like precision in making your trading decisions. You also learn patience.
All traders operate with a finite amount of capital. Whether it is a few thousand or a few million dollars, successful trading can only be achieved by limiting your trading activity to the opportunities that are most likely to succeed, not by taking every chance that comes your way. Not all opportunities are created equal.
It is said that trading is much like playing baseball, in that the more times at bat the more likely you are to succeed. If you swing at obviously bad pitches you will skew your batting average or even worse-strike out-unnecessarily. The same can be said of trading. Taking every buy and sell signal that comes your way is in no way superior to trading solely longs or solely shorts.
Many professional traders come up with one or two techniques that help them trade the markets efficiently. The goal is to help them minimize their losses while at the same time maximizing their opportunity to profit. Sometimes the technique will be something as simple as selling options, other times they can be as complicated as butterfly spreads. No matter what the technique is there are always three components.
First, a trading technique must have a built-in risk management component. Selling options, you might rely on the fact that the majority of options that reach expiration expire worthless (approximately 75 percent). Or, on a spread trade, you limit your downside risk to the difference between a long and a short. Second, a trading technique must be able to be consistently applied to various trade and market setups. Finally, a trading technique takes account of capital appreciation as secondary to capital preservation. This is very important.
Professional traders have a fiduciary responsibility to their clients to preserve their capital, above all else. If they fail in that responsibility it prevents them from collecting incentive fees and will eventually halt their trading altogether. Retail traders should not take their fiduciary responsibility to themselves any less seriously.