Tuesday, March 11, 2014

Four Pillars of Trading Success from a Veteran Futures Trader

I had a long chat with an experienced futures trader that day. He shared with me his four pillars of trading success.

1. Ability to analyze and come out with own ideas.
You should have your own thinking, not to copy others trading ideas. I always stress the important of designing your own trading strategy, not blindly follow some experts' trading method or black box system. You need to understand your strategy inside out, know its characteristics, weakness etc. This is to ensure you are able to follow the strategy confidently when your trading are dealing with market adversity. At the same time, you will know when your system has stop performing statistically like it should in backtesting when market conditions change dramatically.

2. Money
Money here refers to adequate capital. To many, futures trading offer leverage, meaning you can start with very small capital and make huge profits. Many futures trader wannabe I met with started with as small as RM 10K and wished to make ten-fold profits in the shortest time possible. It is possible but the probability is very low. And to make such a huge profit, one need to take enormous risk and this increases the risk of ruin. Capital and risk management in futures trading is as important as cash flow management in a business. If a company faces negative cash flow problem, it might go bankrupt. If you can't manage your risk well in futures trading, your account are doomed to bust.

3. Patient
A good trade does not always start to make money immediately. Sometimes, price goes lower after you bought, causing you with unrealized loss on that particular trade. Panic and impatient trader will exit their position at loss, fearing the loss will widen. If a trade goes in your trade direction, impatient trader will take the profit because they want to lock in the profit and fear the market will take it away if they do not do so. Their behavior prevent profit to grow into huge one. Trend traders on the opposite, let the profit runs as big as possible. In the process, they may let a few unrealized profits turn into small losses. However they reckon this is inevitable and accept this as an expense of running their trend trading business.

4. Luck
Erm... Luck! Are you kidding? Take a look at the chart below.

Scenario 1-You quit your job and started your trend trading business in year 2005. You ended up with very tiny profits or small losses. You were forced to quit trading in early 2006 because profits were not enough to support your life.
Scenario 2-You quit your job and started your trend trading business in year 2006. You were rewarded with huge profits in your first year of trading. Then in 2007, you again made extraordinary profits. In 2008, you probably encountered volatile swings in your account equity earlier in the year, but you have plenty of "house" profits from 2006 and 2007 as buffer. At the end of 2008, you are glad that you didn't deviate from your trading system and were able to take advantage of market collapse to generate spectacular profits.

So, when is the best time to start trading full time? Unfortunately, no one knows when is the best year or so. I am lucky to have started my trading career full time in late 2008. So far, business is running rather smoothly. So, who say luck is not important in trading?

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