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Center for Futures Education, Inc. | Ten Trading Rules

Ten Trading Rules

Ten trading “rules” that have helped traders earn money (or reduce losses) follow:

  1. Money spent on education is well spent. Futures trading is like any other business; it takes time to learn. There’s a lot of literature about futures available. Take your time and study it before you commit any money to the markets. The markets can wait for you; there are always more good trades coming up.
    The more money you spend on your own education, the less you need to rely on someone else to trade for you and the better your decision-making ability becomes. After all, the ultimate risk of loss falls on you. Why not increase your chances of earning a profit by taking an active role in managing your money?
    Being educated doesn’t mean you shouldn’t use a broker; it just means that if you do your own homework, you will know as much about the markets as he does. Also, if you make your own trades with no help from a broker, you may get lower commissions.
  2. Look for trades that have a high profit potential, a high probability of winning, and a minimum of risk. “Cut your losses short and let your profits run” is a good practice. Statistics show that even successful traders lose on a high percentage of trades; thus, it is important that the winning trades be much larger than the losing trades so you make money overall.
    It is also a good practice to be very selective in your trading. Look for markets that are trading below the cost of production without demand waning, or markets at all-time highs without a decrease in supply or an increase in demand. These markets offer an increased probability of success.
  3. Make a trading plan, then stick to it. View trading as a business venture (in fact, it is). Assuming you do your homework, have decided upon a trade, and establish your parameters for potential losses and gains, it is rare that you will need to alter your plan. Stay cool, calm, and collected when implementing your plan. Leave your emotions at home. Let your plan be your discipline when trading.
    Many traders continually refine their system until it stops working. Then, rather than going back to what they originally had, they venture into different areas of analysis. If the original system was making money, return to the original system or quit trading.
  4. Try to protect winning trades with trailing stop orders. Everyone knows that stop loss orders are used to stop one out of a position that is losing money. But what should you do after the trade has gone your way, and you are profitable? Why not have an order in the market to protect your profit? A trailing stop order is used to protect profits in a winning trade. A trailing stop order is activated at a predetermined price and (hopefully) liquidates your position at or near that price. That way, if the market continues in your direction, you continue to make money, but if the market moves against you, you should be stopped out with some or most of your profits still intact. In a highly volatile market, this may not be the case. I know of a person who had a $750,000 profit in a trade. When his broker suggested that he put in a stop to protect his profits that morning, he said “Nah, let’s shoot for a million.” The markets crashed about an hour after their conversation and by the end of the day his account was worth $50,000. It’s O.K. to stay in the market for a larger profit, but it’s a good idea to protect yourself against market reversals with stops.
  5. You can make money on both sides of the market—short and long. In fact, money is often made more quickly on the short side of the market! Most people focus on the long side of the market because they aren’t familiar with short selling. A couple of things to keep in mind when considering a short trade are: 1. Higher-priced markets are more likely to provide candidates for short sales; 2. Higher-priced markets are usually more volatile than lower-priced markets; 3. Stop loss orders generally need to be placed slightly further away from the market price so they won’t be activated too soon; and 4. short positions have unlimited loss potential and limited profit potential. So, while profits can be made faster on the short side, short-selling tends to be somewhat riskier than going long.
  6. Only use money you can afford to lose, and try to limit what you risk to the amount you can afford to lose. If you lose what you put in, quit trading. Don’t throw good money after bad. If you make money, take out the amount in excess of your initial deposit, and put it elsewhere for safe keeping. As an example, if you are willing to risk $25,000, and your account grows to $50,000, take $25,000 out of your account. Subsequently, if you lose the $25,000 that’s still in the account, quit trading.
  7. Do not risk all of your trading capital on one trade. It’s a good idea to limit any loss to 5% of your total trading capital on one trade; for example, if you have $40,000 in your account, you wouldn’t allow a loss of more than $2,000 (5% of $40,000) on any one trade, regardless of the margin requirements for that trade.
  8. It’s not always necessary for you to be in the market. In fact, there are times when there aren’t good buying or selling opportunities. Some people are in the markets for the action, but being in the markets doesn’t guarantee the action will be profitable.
  9. Try to catch a trend near its beginning. As a market appears to be bottoming or topping out, watch carefully for the market to signal that it has reversed. Don’t buy into a declining market or sell a rising market. This is not the same as calling the top or bottom of the market, but is waiting until the market has turned, then assuming a position to profit from the newly established trend.
  10. Charting services or your computer can save you a lot of research time. There is some very good software on the market that facilitates futures trading. Try a search for “Futures Charting Software” to select one that fits your needs. If you don’t want to use a computer, subscribe to a charting service to reduce your market analysis time.

Disclaimer: The information contained on these pages is from sources believed to be reliable. There is no expressed or implied warranty as to the accuracy or completeness of the material. All information is subject to change without notice. Past performance is not necessarily indicative of future results. You should read a "Risk Disclosure Statement" and/or an "Option Risk Disclosure Statement" before trading and should understand the risks associated with futures and options trading. The risk of loss may be substantial. Trading is risky, and many traders lose money. Before trading, one should be aware that with the potential for profits, there is also the potential for losses, which may be large. The information on this web site is not to be construed as trading advice, and should not be relied upon for timeliness as its availability cannot be guaranteed.