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The Top 5 Reasons Futures Traders Lose Money

Joe Fallico is a registered commodity futures broker & holds Series 3 & Series 30 licenses. He is president of Insignia Futures & Options.

I’ve been a futures broker for almost 20 years and I’ve seen many futures traders come and go over that time frame. In my observations, I’ve come to identify what I feel are the top 5 reasons why futures traders lose money in the futures markets.

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I’ve compiled this list not to discourage futures traders but to offer some insight as to what not to do when trading futures and options. Some of these are just common sense but when money and emotions are involved, it’s sometimes hard to keep a clear head and keep a grip on common sense.

You probably have heard of some of these, if not all of them but I urge you to really take them to heart when trading futures (or any other investment products). With that being said, here’s my list (in no particular order) of five things you need to do to avoid pitfalls when futures trading.

1. Don't Base Your Trades on News

I see and speak with many traders who will see a news story on CNBC or in the Wall Street Journal and then will want to place a trade based upon that story. Unfortunately, by the time a news story is being sent out to the public, it’s usually too late to trade on that information. There’s an old adage in investing, which you may have heard: “Buy the rumor, Sell the news.” What this means is by the time the press gets ahold of a market-moving story, it’s already been priced into the markets.

My advice is to not try to make your trades solely on news stories. Of course it’s good to know the fundamentals of a market you may be considering trading, but you don’t want a news story to be your sole reason for placing a trade.

...by the time the press gets ahold of a market-moving story, it’s already been priced into the markets.

2. Get Rid of Unrealistic Expectations

Over the years, I’ve had many clients open an account with $2,000 or $3,000 and expect to turn it into a million dollars in a relatively short period of time (I seriously hear this all the time). They’ll tell me they just read a book or a YouTube video on how to make a million dollars per year trading futures and now they’re going to do it all on their own. I let them know that although it’s possible, it’s extremely unlikely to turn $3,000 into $1,000,000 in a year’s time. That would be a whopping 33,324.63% return! My advice is to be realistic with your investment expectations and do the math. I typically ask, “What would you consider a very good annual return on your money?” I usually hear 20% - 30%, which I agree, would be great. So do the math, a 25% return on a $3,000 investment would be $750. If you are realistic in your expected returns, you’ll be much happier with your trading.

My advice is to be realistic with your investment expectations and do the math.

3. Cut Your Losses

Failing to cut losses is a very big reason futures traders lose money. Time after time, I hear from clients who say, “I’ll just hold on for one more day,” only to see their losses grow bigger and bigger. Many futures traders I see won’t use a stop-loss order, or if they do, they keep adjusting it farther away as the market moves closer to it. My advice: know before you even enter a trade what you are willing to risk on the trade. Set your stop loss order accordingly, and never adjust your stop price farther against your position. By following this very simple but important rule, you'll be able to withstand the inevitable losses that comes with any type of investing and have the funds available for the next trade opportunity that comes along.

Failing to cut losses is a very big reason futures traders lose money.

4. Don't Cut Your Profits

On the same note as #3, don’t cut your profits short. I see far too many traders take profits way too soon. The golden rule in futures trading is “Cut your losses and let your profits run.” Although this seems so simple and logical, many traders let their emotions get the best of them. They may have a profit target on a futures trade to make $600, but once they are in the trade and have a $200 profit going, they start to panic and just exit the position. My advice, start with a sound trading plan before you enter a trade. Know your profit and risk objectives and stick to them. As the market moves in your favor, adjust your stop-loss prices accordingly to minimize any losses or to start locking in profits.

The golden rule in futures trading is “Cut your losses and let your profits run”.

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5. Remember That the Trend Is Your Friend

Trading against the trend and trying to pick tops and bottoms is very dangerous in futures trading. I get calls all the time from clients saying they want to go short in a strong, upwardly trending market. I’ll ask them why they want to go against the trend and I usually hear, “because the market can’t go any higher.” First of all, yes, it can go higher. Secondly, “because it can’t go any higher” is never a good reason to enter a trade. The old saying, “the trend is your friend,” is still true to this day. It’s much easier to go with the flow than to fight the current.

It’s much easier to go with the flow than to fight the current.

I feel the keys to being a successful futures traders are to have a solid trading plan prior to every trade made - and to have the self control to stick to that plan. Never let your emotions dictate your trade decisions.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.