Oddly enough, the question “how to make more money” in online future trading is really the wrong one.
If you are not making good money on your trading activities, you should really be asking the question: what can I do to manage my losses better? If you successfully answer this question, you will automatically generate more profits, and you can belong to the (sadly) small club of wildly successful traders.
But if you don’t answer this question, you will continue to struggle and ultimately be forced out of the market. It is said that 90% of individual traders lose money in the markets and ultimately are either forced out of the market or simply give up. And remember, the first priority of a successful trader is to be around another day!
Managing Losses
No matter how you trade or what you trade, your losses are always equal to:
$loss = $loss/contract * #contracts/trade * #trades
where:
$loss/contract = your losses, in dollars, per contract you trade
#contracts/trade = the number of contracts you trade
#trades = the number of trades you enter over a certain period of time (day, week, month)
Therefore, there are three, and only three ways to lose less money when trading:
- You can reduce your losses by minimizing your loss per contract
- You can reduce your losses by reducing the number of contracts you trade
- You can reduce your losses by simply trading less.
1. How to reduce your $ losses per contract
Very simple…tighten your stop loss!
Believe it or not, most traders do not place stop loss orders at all. So for most of you, tightening your stop loss orders simply consists of, without exception, always placing stop loss orders when you enter the order for your trade.
Where you place that stop loss order is actually quite simple!
Every trade really comes down to the testing of a hypothesis. You place a trade because you have a hypothesis that the market will move in a certain direction.
If you are buying, your hypothesis is that the market will be going up. When you place your trade going long, you are testing that hypothesis.
If the market does go up, it has validated that hypothesis. But if the market comes down, it tells you your hypothesis was wrong. Let the market tell you when your hypothesis is wrong. Then get out. That is where you place your stop loss: where the market shows your hypothesis is wrong.
2. How to reduce the number of contracts to trade
This is the subject of risk or money management. It is a subject that is largely ignored and misunderstood by individual traders.
Most traders let greed get the better of them. They trade as many contracts as they can get away with, as they can “fit in their account” based on margin requirements.
But then the market turns against them, they lose most of their account, and they are out of the market.
Good risk management is probably one of the most important keys to making good profits when trading any market.
3. How many trades should you enter (i.e. how often should you trade?)
Clearly the fewer trades you enter, the fewer times you can lose. And since most individual traders lose money in the markets, entering fewer trades is probably wise for most traders out there.
Entering zero trades (in other words, not trading at all) is probably the best remedy for the losing trader. Stop trading for a while until you understand why you are losing.
If you have been making modest profits but are frustrated because large losses have been erasing most of the profits you have made, ask yourself “why?” What has been happening in your losing trades? Did you really understand why you placed the trade, or did you place it on a “tip” from your broker?
Only place trades that you have a clear reason for. Then let the market tell you whether that reason is still valid or not. Do not use automated systems that you don’t fully understand. Do not trade on news. Do not trade on “tips” from a friend or a broker. Be your own advisor, and don’t enter any trades without fully understanding why this advisor is telling you to enter.
Start looking at your losses today. If you have been losing a lot of money in online future trading, stop trading — even for just a couple of days. Analyze what you have been doing and do not get back in the market until you have identified a cause for your losses. Then, slowly start trading again, with a good risk management approach and above all: place a stop loss order with your entry!