Are you an aspiring futures trader eager to tap into the dangerous and potentially lucrative world of investing in commodities, index funds, and other financial products? If so, it pays to know some of the common blunders that inexperienced traders often make – and then take steps to ensure you avoid repeating them.
In this article, we’ll take a look at eight top mistakes beginner futures traders made and show how easy it is to protect yourself against each one. Avoiding these slip-ups can save your trading account from wasted effort (hopefully money).
Not having a plan
Too often, aspiring traders try to begin trading futures without any plan or strategy. It is one of the most common pitfalls traders fall into and a huge mistake. The lack of research and tools results in entering a market blindly, exposing yourself to risk with no knowledge of how it works. To avoid this mistake, you should develop a comprehensive plan before venturing into futures trading.
Not only should you be doing lots of research, but you should also make sure your decisions are based on clear objectives, existing market conditions and limits on how much capital you’re willing to risk. Taking the time upfront to prepare appropriately can mean the difference between success and failure for any trader.
Trading without proper research
Another huge mistake that many traders make is trading without conducting proper research. It means not understanding a futures contract’s underlying fundamentals and relying on mere technical analysis or hearsay to place trades.
To prevent this, you should spend some time researching your chosen markets to understand how they work and know what risks are involved. Additionally, remember that past performance isn’t indicative of future results, and only make decisions after consulting with a financial advisor.
Overtrading
When traders need to understand how it works, they can easily be overwhelmed by the number of possible trades. It is known as “overtrading” and can cause considerable stress on your trading account.
The best way to avoid this is to create a trading plan that outlines the strategies you’ll use when placing orders and then stick to it. It will help you stay on track and avoid trading impulsively. Additionally, it would help if you always avoided more capital than you’re comfortable with and always set a stop-loss order to protect your account from significant losses.
Underestimating risk
One of the most dangerous trading blunders is underestimating the risk in futures trading. The truth is that futures are highly volatile markets, and inexperienced traders often need to pay more attention to the risk level they’re taking when participating in these markets.
To prevent this, you should continuously diversify your portfolio to spread your risk across different investments. Additionally, you should ensure that you’re familiar with other methods of assessing risk, such as value at risk (VaR). By understanding the risks involved in futures trading and taking steps to manage them, you can protect your account from significant losses.
Failing to use stop-losses
Further to the above point, another mistake that inexperienced traders often make is failing to use stop-losses when trading futures. Stop losses are essential for any trader and can help limit losses in volatile markets.
Having a set of parameters around risk management is imperative, as it will help you stay disciplined and prevent overleveraging. Additionally, it would help if you always remembered to adjust your stop-losses when the market conditions change to protect your account from significant losses.
Chasing losses
Another common mistake that traders make is chasing losses. It means trying to recoup your losses by increasing the capital you’re willing to risk in order to turn your trade around. Not only can this be dangerous, but it can also result in a rapid depletion of your funds.
To prevent this from happening, you should never forget to stick to your trading plan and follow the limits you’ve set for yourself. Additionally, it would help if you never placed trades out of desperation or emotion; instead, take a step back, review the market conditions and assess your options before making any decisions
Not managing your emotions
Trading impulsively is one of the biggest enemies of any trader and failing to control your emotions can lead to disastrous results. Fear, greed, and overconfidence can all affect your trading performance, and you must remain mindful when placing orders.
The best way to ensure that you remain rational when trading is to develop a plan outlining the strategies you’ll be using and then stick to it. Additionally, it can be helpful to create a trading journal where you document your trades and use this as an opportunity to reflect on your performance.
Not knowing when to get out
Finally, many traders wait too long in a losing trade, hoping it will turn around and result in more significant losses. The best way to avoid this is to set a maximum loss limit on each position you take and then adhere to it. You should also ensure that you’re familiar with other exit strategies, such as trailing stop-losses and limit orders so that you can get out of a position at an optimal time.
