Better to be Profitable Than Right

The ultimate goal of a futures trader should be to have overall trading success by being profitable. There is no single-best path one can take on the destination to trading success and profitability. However, there are a few general trading tenets to which all successful traders have subscribed. One such trading tenet is "losing your ego" when trading futures.

Mark Cook, a well-respected trader and trading educator from rural Ohio, for many years has stressed that traders need to lose their egos before getting into trading futures markets. He is also an advocate of survival in futures trading. One must survive in this challenging arena before one can succeed. I enjoyed listening to Mark at a trading seminar a few years ago. He even used to wear bib-overalls (with no shirt) at some of his trading seminars - just to drive home the point that trading futures is not easy and that ultimate success takes a lot of hard work.

My good friend and respected trader and educator Glen Ring also espouses the notion, and may have even coined the phrase, "it's better to be profitable than right in futures trading." Those who know or have talked to Glen know he, too, is a no-nonsense, no-hype trader who takes a yeoman's approach to the business. When asked what direction a specific market "will" go in the future, Glen is never afraid to say, "I don't know," before he adds that, "successful trading is not a business of predictions but one of probabilities based on past price history."

It's been reported that people who get into the endeavor of futures trading tend to be of higher-than-average intelligence and have more aggressive personalities - called "Type A" personalities. Having higher-than-average intelligence certainly can be advantageous in any field of endeavor. However, in futures trading, possessing the "Type A" personality can be a disadvantage. Reason: More aggressive and competitive people do not like to lose and do not like to be wrong. It's a time-proven fact that trading futures is about absorbing numerous losing trades. But that does not mean "Type A" personalities cannot succeed in futures trading. Those with the competitive and aggressive tendencies just need to realize they possess those traits and then manage them properly when trading futures. (My wife says that I'm a "Type A" personality, but I say I'm not. I just know I'm right and she's wrong - just kidding!)

Most have heard the simple trading adage, "Cut your losses short and let your winners run." What this also implies is that during any given year the vast majority of futures traders will see more losing trades than winning trades. Yet, some can still realize profits by getting out of the more numerous losing trades quickly at small losses (by setting tight protective stops), and allow the fewer winners to run and accrue bigger profits.

Just think for a minute about the futures trader who does not want to lose his or her ego. This is the trader who likes to be right and cannot stand to be wrong. In fact, this type of trader will probably go to great lengths just to be proven right. What does this mean when executing trades? It probably means that the trader who hates to be wrong won't be willing to get out of a losing position at a small loss. Instead, this type of trader may pull a protective stop when in the heat of a trade, or may not use protective stops at all - in the hope that he or she will be proven correct. This type of trader is likely to see a small loser turn into a big loser, and might even get a margin call from his or her broker. And if this type of trader repeats this scenario and keeps absorbing big trading losses, he or she will eventually be forced to exit the endeavor of futures trading. This is also the type of person who would likely blame the markets or the broker for his or her lack of trading success.

Be a humble futures trader. If you are not a humble futures trader now, the markets will eventually make you one - and very likely sooner rather than later. I guarantee it. There are few guarantees in futures trading but this is one that I can make.

Peak Performance Trading Tips

Jack Schwager's primary conclusion after writing the first two Market Wizard books is that great traders all have developed systems that fit who they are. I tend to agree that that's one of the secrets to success. Chapter 4 of the new edition of my book, Trade Your Way to Financial Freedom presents my revised 14 step model for designing a system that fits you. While I cannot do justice to the model in a short tip, what I can do is list some of the criteria you might want to think about in order to design a system that fits you.

Some of the criteria were mentioned in the last tip and I'll just add to that.

1. You need to know who you are. How can you design something that fits you if you really don't know who you are?

2. Once you know who you are, then you can determine what your objectives are and design a system to fit those objectives.

3. What are your beliefs about the big picture and to what extent must your system be able to fit your big picture beliefs. For example, if you believe that the U.S. dollar is doomed to collapse over the next 15-20 years, how would that affect your thoughts about developing a trading system.

4. You can only trade your beliefs about the market, so you need to understand what those beliefs are. What specifically do you believe about the market and how does that give you an edge? When you understand these criteria, then you can specifically design a system that you are comfortable.

Let's take a look at one example. Suppose you believe that markets are not really random because there are big trends in the market that don't fit the price movements you'd expect of random markets. You perhaps believe that the best way to make money in the markets is to find and capitalize on those trends. Now if this was your primary belief, do you think you could do the following?

• Buy things that were out of favor that nobody likes? Probably not because this doesn't fit the primary belief that you believe gives you an edge.
• Sell high and buy low, like a band trader is likely to do? Probably not because this is a very different mentality.

Now I could give lots of examples of beliefs and lots of examples of things that might be hard for you because they don't fit those beliefs. Hopefully, you've got the idea by now. You must determine what you believe about the markets that will give you an edge because you can only trade something easily that fits your beliefs.

5. Next you must understand the various parts of a system and the beliefs that you have about each of those parts. For example, what do you believe about setups, entry, stops, taking profits, position sizing etc. Again, you can only comfortably trade your beliefs

For example, suppose you want to catch trends, but you believe in tight stops. This means that you could easily get whipsawed in and out of trades a lot, but that when you do catch a big trend, your total reward will be many times your initial risk.

6. One of my beliefs is that a trading system is characterized by the distribution of R-multiples that it generates. (See prior tips for a discussion of what R-multiples are (or see the book). That distribution will have a mean and standard deviation that will tell you a lot about how easy it will be to trade. So you must decide what your system's R-multiple distribution must be like in order for you to be willing to trade it.

7. Another way of stating #5 is to ask yourself, "What criteria must my system meet in order for me to be able to comfortably trade it?" And while I can give you lots of suggestions, this is still a matter of personal comfort and a big part of developing a system that fits you.

8. You must also ask yourself, how can I use position sizing to meet my objectives and what is the probability, given the systems R-multiple distribution, that I will be able to do that. And if you have an accurate sample of R-multiples, then you can probably answer this question through simulations.

Lastly, you must ask yourself, what you will do to make sure your system fits all of these criteria well enough for you to be comfortable trading it. If it doesn't meet some of your criteria that well, what will you do to make it fit? Or will you change your criteria?

4 Key Questions to Gauge Your Trading Success

The attitude of the individual trader (part of the important aspect of trading psychology) plays a huge role in success (or failure) in futures trading. For a trader to become successful, he or she must enjoy the "process" of futures trading.

I have a few questions below that will help determine whether you are a good candidate to become a successful trader--if you don't feel you already fit into that category.

Before I get to the questions, it's important to touch upon the term "trading success." What is trading success? Many would reply that trading success is defined as being profitable at trading-­making more money at futures trading than one loses. I cannot disagree with that definition, but there is more to trading success than just the amount of profits accrued from trading. To better explain, here are examples of two hypothetical traders:

1. Trader Bob just started trading this year and has racked up $50,000 in futures trading profits. But he's not happy with that figure. He wants more. Bob wants to "bring the markets to their knees"--and quickly. Bob does not at all enjoy studying charts or reading and learning about fundamental factors that impact markets. His trading decisions are based mostly upon "tips" from friends or his broker. Soon, Trader Bob says he will begin establishing larger trading positions to accrue even bigger and faster profits.
2. Trader Mary has read many books and attended trading seminars--and "paper traded" before she began putting "real money" on the trading table. She, too, has been trading for around one year, and has accrued about $2,000 in profits. She enjoys studying charts, reading about market fundamentals and continues to read books on how successful traders became successful. Trader Mary enjoys the interaction she has with other traders with whom she has become acquainted. She does not get overly excited about winning trades or overly discouraged about losing trades. Trader Mary knows she's "in it for the longer haul" and figures that if she works hard, uses sound money management and "loses her ego," then hopefully good things will come from trading futures.

One can argue that both Trader Bob and Trader Mary have been successful futures traders. But which trader would you say has been most successful? Which trader would you say will continue to be successful? Most would agree that Trader Mary is achieving the greater degree of success in futures trading--even though she does not have nearly as much trading profits as Trader Bob. No doubt, Trader Bob has seen a very good run of trading profits. However, he appears to be a "flash in the pan" and is very likely doomed to "flame out."

One more analogy before I get to the questions that may help determine if you are, or will be, a successful trader. (I think my friend and respected fellow trader and educator Joe DiNapoli would agree with this analogy, as Joe restores classic cars, too.) Trading futures is like rebuilding and restoring a classic automobile. There are several tasks (many of them tedious) on the road to completing the restoration. Those restorers who do not enjoy the tasks of restoring likely will not continue to restore, and will not have a good finished product. Those restorers who take their time and enjoy the entire process of restoring an automobile will have a very fine finished product. The same is true with trading.

Now, here are a few questions to help determine if you are, or will be, a successful futures trader:

1. Do enjoy the entire process of trading futures--from studying charts, reading about and learning fundamentals, listening to and learning from mentors, and even figuring out what mistakes you have made in previous trades, and how you will improve from those previous mistakes? (Remember, a trader never stops learning and should never stop seeking knowledge about markets and trading.)
2. If you are a beginning trader with less than a couple years experience, are you willing to use the very sound money management principles required for survival in futures trading--even if it means meager profits (or meager losses) the first year or two?
3. Do you have the "patience" to wait for good trading opportunities to develop, and then have the "discipline" to follow your trading plan once you make the trade?
4. Are you the type of person who CAN stand to lose, and can you accept that trading losses are your own fault? (This is a very important question, because the typical futures trader has a more competitive personality. Remember that even the most successful traders have losing trades--and sometimes several in a row.)

If you have answered "yes," to these questions, then your road to trading success will be less rocky. If you answered "no" to any of the above questions, then you face a more difficult task on the road to trading success, and you need to figure out what changes you should make to make the "process of trading" more rewarding.