Futures Traders Practicing For Success

"Practice makes perfect," my mother used to say. It's as true of futures trading as of anything else. Before you put your hard-earned cash on the line, you need to practice trading if you want to succeed as a futures trader.

Making practice trades allows you to:

1. Test and fine-tune your trading system.
2. Learn to successfully pull the trigger.
3. Perfect your charting system.
4. Develop productive trading habits.
5. Practice self-discipline.

See if you have what it takes to be a futures trader.

That last item is very important. You can have the best system in the world but if you don't believe in yourself, if you don't believe in your system, if you don't have the passion to trade, no system in the world will make you a successful futures trader. Like I tell my students, successful futures trading is 90% attitude. Not everyone has the skill, passion, ability or discipline to succeed. Better to find out before you lose your money.

In my Futures Trading Secrets course, I recommend that students practice trading on the e-Mini with Sims Broker until they achieve a certain level of confidence and consistency in their trades. Practicing futures trading on paper is important before you attempt the real thing. Before you start trading with real money, you must develop the discipline to control your emotions and stick to your system. Plunking down cold, hard cash opens the door to greed and fear, which can submarine even the best system if not held in check. Practice will give you the skill, confidence and courage to succeed as a futures trader.

Practice trading should be as detailed and meticulously recorded as the real thing:

1. Log and study your profits and losses.
2. Look for patterns that indicate when you successfully pulled the trigger and when you failed.
3. Work to increase successful strategies and decrease unsuccessful ones.
4. Develop successful daily trading habits and routines.

Remember to practice the discipline to stick to the daily habits and routines even when you don't feel like it or they don't seem to be working. Discipline and routine are essential habits of the successful futures trader. Every trader loses sometimes. You have to have the discipline to follow your routine and have faith in your system even when you're losing, if you are to ultimately succeed.

You'll find this systematic approach true of successful athletes, businessmen, writers, dog trainers and, of course, futures traders. If you look at what makes a person successful, you'll discover that he or she has developed a specific routine and follows it religiously every day.

For instance, Tiger Woods doesn't plop the ball on the ground and flail away. He follows a regimented and very carefully practiced series of steps to give himself the best possibility of success. Following a pattern of behavior time after time has helped to make him the world's most successful golfer.

The routine is easy to see in dog training where each training module educates, reinforces, builds on success and leads to the next step. The trainer has broken into a series of steps the behavior he desires the dog to achieve. Before he can heel successfully, a dog learns to follow a series of necessary preliminary steps: sit, stay, start, stop, heel. With practice he learns to watch your left leg and move with it, starting and stopping as you do. In time, the behavior becomes so ingrained the verbal commands are no longer necessary.

My students say it with me: "One of the most important things you can do to improve your trading is to develop specific patterns of behavior."

Risk

Risk is concerned with the unknown. Upside risk is the possibility of gain. Downside risk is the possibility of loss. One half the reasons to use options (like other derivatives) is to reduce risk. Certainty is exchanged with other players who assume the risk in hope of big gains. It is wrong to state that "options are risky."

reduce risk: The seller of a covered call exchanges his upside risk (gains above the strike price) for the certainty of cash in hand (the premium). The buyer of a covered put limits his downside risk for a price - just like buying fire insurance for your house.

increase risk: The buyer of a call wants the upside risk of an asset, but will only pay a small percentage of its current value, so his returns are leveraged. The seller of a put accepts the downside risk of locking in his purchase price of an asset, in exchange for the premium.

To understand risk, look at the four standard graphs of options (put-call-buy-sell). The value of the options in the interim between purchase and expiration will not be exactly like these graphs, but close enough. In all cases, the premium was a certainty.

Buyers start out-of-pocket. But going forward, the option buyer has no downsider risk. The graph either flat lines or goes up on either side of the spot price.

Sellers start with a gain. Going forward, they have no upside risk. These graphs either flat line or go down on either side of the spot price.

The extent of risk varies. Buyers/sellers of calls have unlimited upside/downside risk as the asset price increases. Buyers/sellers of puts have upside/downside risk limited to the spot price of the asset (less the premium).