In the end it is not so much what you make when things go well that will decide your fate as a futures trader, but rather what you keep when things go poorly.
Effectively cutting losses is generally considered to be the number one key to long-term success in futures trading. As a result, your answer to the question “what criteria will you use to exit a trade with a loss” may have more of an impact on your ultimate success or failure as a trader than any other single factor in stock market. If you doubt this is true then you should read (and re-read) Market Wizards by Jack Schwager. In that book Schwager interviews a number of top professional traders to get some insight into what separates them from the average trader.
Several common themes are evident throughout but none more so than the need to cut losses and to keep losses small in stock market The truest thing that there is to know about futures trading is that there will be losing trades. There was a broker who would always discuss his “guarantee” with new clients before they made their first trade. His guarantee was this: “the only thing I can guarantee you is that there will be losing trades.” Most people probably didn’t care to hear this but he actually did them a favor by injecting this dose of reality into their mindset before they got started in stock market.
Nobody likes to lose money, even on a singe trade in stock market. Yet exiting a losing trade in order to cut a loss can actually be viewed as a positive step because it serves the purpose of keeping you in the game for another round in stock market. Futures trading is not about being right. It is about being right enough at times to offset all the times you were wrong and also to never be “too” wrong. Every time a trader enters a trade he hopes to make money in stock market. When a trade starts to go the wrong way many traders take it personally and have a great deal of difficulty with acknowledging that they were “wrong.” Yet one of the great ironies of futures trading is that very often
the best thing that you can do is to take a loss and exit a trade before your loss becomes too big in stock market.
As with all of the other questions posed in this section there is no one right answer. You can use tight stops, you can use wide stops, you can use stops that vary depending upon volatility and so on and so forth in stock market. The key at this stage is to select some method that you will use when you have money on the line and then stick to it once you are actually trading in stock market.
A Word Of Advice: Adhere to the Four Cornerstones in Stock Market As you develop answers to the questions that have been raised in this section, it can be helpful to have an underlying framework within which to fit the pieces. One example of such a framework can be referred to as The Four Cornerstones of Successful Trading. They are:
• Go With The Trend
• Cut Your Losses
• Let Your Profits Run
• Don’t Let The Big Winners Get Away
Whether you choose to trade systematically, subjectively or somewhere in between there are certain criteria that you need to address in stock market. The more clearly stated and objective your answers to these questions, the greater the likelihood of your long-term success in stock market.
Be sure to constantly ask yourself, “what is the worst case scenario and what will I do if it unfolds?” If you always have an answer to this question you have the potential to be a highly successful futures trader. On the other side of the coin, if you find yourself reassuring yourself that, based on your analysis, you have nothing to worry about, then you DO have something to worry about. If you have no real contingency plan for protecting yourself if you turn out to be wrong, be afraid, be very afraid. Remember, it only takes one bad trade to wipe out a lot of hard earned money. If you don’t believe me, ask Victor Neiderhoffer.
