Beginners' Approach to Trading Futures
Trading Psychology & Preparation Every New Trader Needs
Oct 12, 2009
In simple terms, the buying and selling of financial instruments is known as trading. Trading futures, stocks or currencies is not a business for the faint hearted.
Every newbie contemplating switching to a full or part time career in trading needs to address a very fundamental question of whether he or she can afford to lose the capital set aside for this purpose. If the answer is a No, then continue to hold on to a regular day job. If it is a Yes, then the individual’s mind and body will need conditioning to withstand the potential challenges of trading.
Trading Psychology for New Traders
Trading psychology is the mental aspect of trading. Stress and mental strain can affect the well-being of an individual in particular when losing hard earned money in a matter of minutes or even seconds. Risk management relates to the probability of winning and losing in a trade whereas money management concerns the preservation of the trading capital. Both require the new trader's discipline, mental strength and experience that come with years of trading.
Trading experts generally say that eliminating emotions and having objectivity are part of a trader’s psychological build up i.e., knowing what the market is and telling the trader and not what the trader hopes the market will do. Most individuals who have traded at some point would have heard or read some of the following advice from veteran traders:
- Be patient. Look out for a potential trade setup. It is not the quantity of trades that count but the quality of trades taken that is important.
- Get into the habit of putting a stop loss order for every trade. Cut loss when the market turns against the trade entered. It is easier to recover small losses than bigger losses later.
- Do not be greedy and get carried away. Take a small profit and build up the skill and confidence first. Never let a winning trade becomes a losing trade.
- Do not become emotional or fearful. With consecutive losses, stop and take a break. There are always opportunities to recoup later.
- Listen with caution to a broker, a friend or CNBC. Focusing on the technical conditions i.e., what the charts are telling is equally important.
By taking these pointers into consideration, everyday can be viewed as a new business day. It is prudent for the new trader to cultivate a habit of developing a trading plan and eventually a comfortable trading style.
The New Trader's Approach
Most brokerage firms will advise new traders to trade with a simulated account first i.e., do paper trading to get familiarized with the trade and trading platform. However, some newbies doing a paper trade may be too trigger happy with the trading platform as real money is not involved.
It is important for a new trader to treat paper trading with respect as though trading in a real account. Many technical analysis indicators giving reliable forecasts of changes in price are available to the trader. A new trader's effort to experiment with a few when paper trading builds the needed discipline in real trading.
Drawing Trendlines
Charting the direction of the trend gives an objective assessment of where the market is heading. For example, by connecting the low rising points of the candlesticks, an uptrend or support line is formed.
The support and resistance lines should be charted over a few time frames. On a 5 minute chart, the entry or exit point of the trade could be determined and on a 60 minute chart, an assessment of the longer trend for day trading could be made. Knowing the treadlines in the daily, weekly and monthly charts will also give the trader a more balance outlook of the market- bullish or bearish.
Pivot Points
Pivot points are predictive indicators calculated by using the previous day's open, high, low and close prices to determine the potential support and resistance levels for the following day's trading activity. Should the market price trades above the pivot point, it may be used to act as the new support level. On the other hand, if the price is trading below the pivot, it can become the new resistance level.
Volatility
Seasoned traders will understand volatility. It is the pace at which the price of the instrument moves up and down. More volatility may mean more risks of being stopped out. Volatility can usually be seen when there are announcements or when a report such as the FOMC Minutes, Non-Farm Payrolls and Unemployment Rate is released during the trading hours.
Other Trading Indicators
Each trader behaves and reacts differently and a new trader will do well to try out various indicators to find out which work best for him or her. The Moving Average (MA), Moving Average Convergence Divergence (MACD), and Stochastics are other simple to understand and use indicators.
Combining them with the use of trendlines and pivot points will give the new trader a realistic feel of what to expect when trading live.
Entering and Exiting a Trade and Trade Setup
Once the new trader gets a feel of entering and exiting a trade and recognizes trade setups, there is a need to practise other trading methods like averaging into a trade, adding additional positions on profits, scaling out with profits or scaling out with losses. By being well prepared, the new trader has more options to decide how to manage the trade later in a real account.
Trading is Rewarding
Trading is hard work but rewarding. In addition to skill and experience, a lot depends on the trading psychology of the individual. Two traders may be seeing the same chart but one may end up with a winning trade and the other a losing trade.
Good habits acquired when paper trading will set the stage for a higher probability of success when trading with real money.
Reference:
Murphy, John J. Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications Prentice-Hall, 1986.
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