ified portfolio of markets. Proper diversificationcan go a long way towards reducing your risk of ruin. Itis a commonly known fact that some markets trade similarly60
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
while others do not. The extent to which two differentmarkets trade similarly is referred to as their “correlation.”A statistical function known as the “correlation coefficient”can tell you how closely the price fluctuations of twomarkets mirror one another. Two markets that tradeexactly the same would have a correlation coefficient of 1.On the other end of the spectrum, two markets that tradeexactly the opposite would have a correlation coefficient of-1. Markets whose price movements have no correlationwhatsoever would have a correlation coefficient of 0. Alack of correlation between markets offers an opportunityfor astute traders to minimize the fluctuations of the equityin their account. Let’s illustrate this by looking at twodifferent portfolios.Consider a portfolio trading T-Bonds, 10-Year T-Notes and5-Year T-Notes using the same approach. Each of thesecontracts fluctuate based upon changes in interest rates.These contracts will generally rise or fall together with themain difference being the magnitude of their pricemovement. If you are trading them all using the sameapproach it is likely that at times you will be long all threecontracts or short all three contracts. If interest rates aregenerally rising, each of these contracts will likely fall inprice. If interest rates are falling, each of these contractswill likely rise in price. As a result, when you are on theright side of the market you will certainly score some biggains. However, if you are long all three contracts andinterest rates spike higher you will likely take a significanthit. You may achieve good profits trading this portfolio,but in terms of risk control the thing to recognize is that
61
TRADE SECRETS
you will almost certainly experience some sharp swings inaccount equity. If these swings are more than you canhandle you may be forced to stop trading before reapingthe full benefit of your approach.Now consider an account trading a portfolio of T-Bonds,Natural Gas and the Japanese Yen. These marketsfluctuate based on different variables. If you are tradingthem all using the same approach there is no inherentreason to expect them to trade in a similar manner. Attimes they may all rise or fall in unison, but more oftenthan not they will be rising and falling independently fromone another. Also, there may be periods when two of thethree markets will be trading in a narrow range andoffering few profitable trends. At the same time the thirdmarket may be trending strongly, thereby giving a traderthe opportunity to make enough money trading thatcontract to offset his losses in the other two contracts.The equity curves for these two portfolios using a particularsystem are shown in Figures 3-1 and 3-2. Note that theportfolio trading just the three interest rate contractsactually made more money over a four and a quarter yeartest period than the diversified portfolio. In retrospect, aperson could say that this was the “better” portfoliobecause it made more money. But take a close look atthe relative choppiness of these two equity curves. Whereasthe interest rate only portfolio had a number of sharpdrawdowns and some drawn out flat periods, the diversifiedportfolio for the most part crept steadily higher throughout.Most traders would have a far easier time sticking to a
62
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
trading program trading the diversified portfolio in thisexample, even though it earned less profits.Figure 3-1 – Equity Curve for Concentrated Portfolio
Courtesy: Futures Pro by Essex Trading Co., Ltd.Figure 3-2 – Equity Curve for Diversified Portfolio
Courtesy: Futures Pro by Essex Trading Co., Ltd.
63
TRADE SECRETS
Risk Control Method #2: Diversification Among TradingTime Frames and MethodsIn Section One we discussed the importance of determiningthe type of trading style (trend-following, counter-trend,etc.) and trading time frame (day trading, short-termtrading, long-term trading, etc.) that are best for you.Generally, when starting out it is best to settle on one typeof trading approach and to focus your efforts there. Astraders progress and as their account equity grows, itmakes a great deal of sense to consider trading using morethan one method. Be aware that you need to have acertain level of experience and expertise in order to applythis approach, since the complexity level rises also.The primary purpose of using multiple trading methods isto attempt to smooth out the equity fluctuations in youraccount. What you hope to accomplish is to apply a secondmethod which will, in highly technical terms, “zig” whileyour other method “zags.” Ideally, while one method isexperiencing a drawdown, the other method will begenerating profits to offset all or at least part of thoselosses.The first step is to develop a second trading method thathas a realistic probability of making money in the long runin its own right. There is no point in diversifying into amethod that is going to be a drain on your trading capitalsimply for the sake of diversification.To understand the potential benefits of trading in differenttime frames, consider the following example of a traderusing both a short-term trend-following method and a longterm trend-following method to trade two contracts of each64
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
market in a diversified portfolio. Each system uses somemethod to identify the current market “trend.” However,one system is looking at the short-term trend while theother is looking at the long-term trend. For example, onesystem might use a 10-day moving average of prices toidentify the trend and the other system may use a 100-daymoving average. At times the two systems will be “in sync.”However, because the two systems are looking at the samemarket in two different ways, at other times one methodwill say the trend is “up” and the other system will say thetrend is “down,” or perhaps “neutral.” So if the tradertrades one contract of a given market based on eachsystem, the possibilities are as follows:Short-Term
UPUPUPNEUTRALNEUTRALNEUTRALDOWNDOWNDOWN
Trend
Long-Term
UPNEUTRALDOWNUPNEUTRALDOWNUPNEUTRALDOWN
Trend
Net
Position
Long 2Long 1FlatLong 1FlatShort 1FlatShort 1Short 2
Note the effect of various market conditions on thepositions held by this trader. The best situation for atrend-follower is for a strong trend to develop—no surprisethere. If the short-term and long-term trends are both upor both down, the trader will have his maximum long orshort position of long two or short two contracts. Underany other circumstance this trader will have either areduced position, long one or short one, or no position atall. If the two trends are not “in sync,” or if they are both65
TRADE SECRETS
neutral, the trader will have no position, i.e. no exposurein the market place. This makes perfect intuitive sense.If the trends are not in sync or if both are neutral, whywould a trend-follower want a large exposure in the marketplace anyway?This is only one example of how trading time frames andmethods can be combined. Other examples might be tocombine a trend-following approach with a counter-trendapproach, or a technical approach with a fundamentalapproach, etc. Assuming both approaches have positiveexpectations, the combined equity curve may be far lessvolatile than either one would be if traded separately.
Risk Control Method #3: Proper Account SizingThis topic was discussed in great detail in Section Two.Nevertheless, because it is such an important topic itwarrants another mention here. Drawdowns are the baneof futures traders. When you are making money everythingis fine. It is when losses start to mount that doubt creepsin. The longer a drawdown lasts and the deeper it cutsinto your equity the more painful it becomes. A traderstarts to think “I wonder when I’ll get back to a new equityhigh, or even if I’ll get back up to a new equity high.”It’s like inadvertently getting on the down elevator in askyrise; you don’t know how long it will be before you getback to the floor you were just on.Drawdowns are never easy to deal with. However, if youexperience a drawdown that is within the realm of what youhad expected going in, it is a far different situation to dealwith emotionally than if you figured you would never66
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
experience anything worse than a 15% drawdown and nowyou are 30% in the hole. Or even worse, if you reallyhad no idea what to expect in terms of drawdowns whenyou started out, and you suddenly find yourself deep in thehole. Under such circumstances it can become almostimpossible to maintain confidence in your approach.Following the steps in Section Two can give you some ideaas to what you can realistically expect from your tradingapproach, both in terms of profitability and drawdown asa percentage of your trading capital. By properly sizingyour trading account you take an important step towardminimizing your risk even before you make the first trade.
Risk Control Method #4: Margin-to-Equity RatioAs discussed in detail in Section Two, one of the keys tolong-term success is to develop a portfolio which is “right”for the amount of capital that you have in your account.If you trade “too small” you forego the opportunity tomake money that you could make. If you trade “too big”you run the risk of experiencing sharp and occasionallypainful drawdowns in your account equity, which may causeyou to stop trading prematurely. This not only eliminatesthe opportunity to make money it also eliminates theopportunity to recoup your losses. If you trade “way toobig” for your account size you run the risk of “tappingout.”While the discussion in Section Two was fairly detailed,there is a simple rule-of-thumb measure that can tell youhow heavy you have your foot on the gas. This measureis referred to as the margin-to-equity ratio. To calculate67
TRADE SECRETS
this ratio simply add up the initial margin requirements forall of the positions in your portfolio. Then divide this totalby the equity in your trading account to arrive at yourmargin-to-equity ratio. Let’s look at a simple example.Trader A has a $30,000 trading account and at any pointin time may have positions in T-Bonds, Soybeans, CrudeOil and Japanese Yen. Let’s also assume that the initialmargin requirements for each market are as follows:T-BondsSoybeansCrude OilJapanese Yen
$2700$ 750$1400$2650
If we add up these initial margin requirements we get a totalof $7,500. In other words, if this trader were long or shortone contract of each of these markets at the same time, hisbrokerage firm would require him to hold a bare minimumof $7,500 in his account. If we divide $7,500 by the$30,000 that he actually has in his account, we get a ratioof 25%. So this trader’s margin-to-equity ratio is 25%.This value can and will change over time. Clearly, as theequity in his account rises or falls this value will change.Also, margin requirements that are set by the exchanges canand do change from time to time based on the fluctuationsof individual markets. Finally, as the number of positionsyou hold rises, your margin-to-equity ratio rises, and as thenumber of positions you hold declines, your margin-to-equityratio declines.The obvious question is “what is the right margin-to-equityratio to maintain?” If your only goal is to maximize yourprofitability there seemingly is no reason to limit your68
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
margin-to-equity ratio. However, the other side of the coinis risk exposure. While the margin-to-equity ratio does notmeasure your actual dollar risk, it does give you a quickand easy way to get a handle on the relative level ofexposure you have in the market place at any given pointin time. In other words, if your margin-to-equity ratio is10%, clearly you have less exposure than if it were 30%.The ultimate goal is to maximize your profitability whileminimizing your exposure to risk. If Investor A andInvestor B both make 20% a year, but Investor A uses anaverage margin-to-equity ratio of 10% while Investor Buses an average margin-to-equity ratio of 30%, clearlyInvestor A is the more efficient trader as well as the oneless likely to run into trouble along the way.As far as what is the “right” margin-to-equity ratio, for thisthere is no absolute right or wrong answer. The generalrule-of-thumb regarding a prudent maximum margin-toequity ratio is 30%. In other words, most traders wouldbe well advised to maintain a margin-to-equity ratio below30%. Trading with a margin-to-equity ratio greater than30% should be considered an “aggressive” approach totrading futures.
Risk Control Method #5: Stop-Loss OrdersStop-loss orders are an important topic when it comes tofutures trading. A stop-loss order is an order that youplace with your broker to exit an open position if it reachesor exceeds a certain price. This is often referred to as amoney-management stop. The purpose of a moneymanagement stop is to attempt to limit your loss on eachindividual trade to a certain maximum amount.69
TRADE SECRETS
There are several schools of thought regarding the use ofstop-loss orders. Some say you should always use a stoploss order and have it placed in the market as an openorder. Some say you should use mental stops, meaningthat you do not actually place the order to exit a losingtrade until the market you are trading nears the stop priceyou had in mind. The third camp says that stop-loss ordersshould not be used at all, because they either interfere withthe system you are using or because markets have a wayof “running” stops, thereby stopping out a lot of tradersjust before the market goes back the other way. So whichapproach makes the most sense and which is the most likelyto help generate the best results in the long run? Beforeattempting to answer this question, let’s define exactly whata stop-loss order is, how it works, and the implications ofusing or not using stops.
Placing a Stop-Loss Order In theMarket PlaceLet’s say you have a $20,000 trading account and havedecided to risk no more than 5% of your trading capitalon any single trade. You turn bullish on Soybeans and buyone contract of November Soybeans at a price of $5.00/bushel. In an attempt to limit your risk on this trade to5% of your trading account you decide to place a stop-lossorder with your broker. 5% of $20,000 is $1,000.Soybeans trade for $50 a cent. So you can risk a $0.20move against you. You then call your broker and placean open order (meaning it will remain in the market placeuntil it is either filled or canceled by you) to sell oneNovember Soybean contract at $4.80/bushel. If Soybeans70
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
trade at or below $4.80/bushel, your order will become amarket order, meaning you will sell one contract at thecurrent market price.This brings up an important point. You should be awarethat placing a stop-loss order at $4.80 in this example inno way guarantees that your loss will be limited to $1,000.Soybeans can move up or down as much as $0.30 a dayat which point it has made a “limit” move. If it rises$0.30 from yesterday’s close it cannot trade any higher.If no one is willing to sell a contract the market will remainlocked at that price in what is known as a “lock limit”move. So in our example, it is possible for Soybeans toopen lock limit down at $4.70, thereby triggering yourstop. However, if prices remain lock limit down (i.e. thereare no buyers willing to step up) your order would not getfilled and you would be sitting with a $1,500 loss, eventhough you did not want to risk more than $1,000.Not all markets have “limits.” As discussed in Section Two,this is something of a mixed blessing. If you are tradinga market that does not have any daily limit then you don’tneed to worry about a lock limit move against you. Onthe other hand, there is also no real limit as to how far amarket can move against you on any given day.One disadvantage to placing an open stop order in themarket place is the phenomenon that you are certain toexperience if you do so. The market you are trading justseems to know where your stop is and trades to or justbeyond that price just long enough to stop you out, beforemerrily resuming the trend that you had anticipated in thefirst place. If you place open stop-loss orders in the71
TRADE SECRETS
market you had better just get used to this cruel twist ofMurphy’s Law because it is not an uncommon occurrence.One other complaint about stop-loss orders espoused bythose who say stops should not be used is that they caninterfere with the system you are using to trade. Forexample, say you develop a method for identifying thetrend of T-Bond futures. It gives a buy signal so you buyone T-Bond contract. You also place a stop-loss order inthe market place. The tricky situation that arises is whenyour stop-loss price is hit but your system is still bullish.Suddenly, even though you should be long in the marketaccording to your system, you are now flat because yourstop-loss order got filled. What to do, what to do?Despite these potential negatives, placing stop-loss ordersin the market does offer one significant benefit. Beforediscussing that benefit, let’s consider the implications ofusing mental stops or no stops at all.
Using Mental StopsUsing a mental stop means getting into a trade, identifyinga price at which you would like to exit in order to cut yourloss and then waiting for the market to hit or at least getclose to that price before actually placing your order in themarket place. Another approach is to wait for a certainset of exit criteria to be met and then entering an orderto exit the trade at that time. Mental stops are popularwith traders who used to place open stop-loss orders butgot sick of seeing their stops get hit just before theexpected trend resumed. This type of stop is also used bylarge traders who don’t want an open order to buy 10072
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
T-Bond contracts sitting in the market place for fear thatsomeone might get wind of it and “run their stop.”While mental stops can at times allow you to avoid“whipsaws,” they do have one serious and (for manytraders) potentially deadly fault. Consider the situation youput yourself in when you decide to use a mental stop.What you are saying is that “at the worst possiblemoment—when the pain of losing money on a given tradebecomes too great—I will absolutely, positively pick up thephone, call my broker and place an order to stop myselfout.” Many traders feel that they are up to this challenge.And many traders are up to this challenge, except for thatone time when they just know they are right, that themarket is going to reverse at any moment, and that if theyjust wait a little bit longer and give the market just a littlemore room, then they won’t have to suffer a big loss andeverything will turn out OK.The problem with putting yourself in this situation is thatthe scenario just described is exactly how a lot of losingtraders go belly up (including losing traders who werewinning traders as little as one trade prior). That one badtrade, when they just could not pull the trigger, does themin. If you have never witnessed this happen to someone,just picture standing next to your best friend while his orher house burns down and then you will get the idea.Mental stops, while perfectly logical and at times highlyeffective, are an invitation to disaster.
73
TRADE SECRETS
Not Using Stop-Loss Orders At AllThe third camp regarding stops advocates not using stoploss orders at all, primarily because they can interfere withthe system being used to trade. At a certain level thisthinking makes a great deal of sense. The underlyingprinciple is simply this: if you have a winning system withoutstop-loss orders, why bother messing it up by gettingyourself stopped out of trades that might otherwise end upwinners? Just let the system do its thing. Unfortunately,this “certain level” is the theoretical level. And you willfind in futures trading that at times there is a chasm amile wide between theory and reality. This differencebecomes most apparent when you actually start trading andget into a position but it starts to go horribly against you,leaving you with two choices:a) Stick with it no matter how bad it gets because “my systemwill be profitable in the long run”b) Run like hellThe second choice goes against the way most people think.We are raised to persevere and to fight until the end.However, when engaging in an endeavor that exposes youto unlimited risk, the very qualities that may earn youadmiration in other areas of life can cost you large sumsof money. The long-term goal in futures trading is to winthe war, not each individual battle.
74
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
The One Important Benefit ofStop-Loss OrdersEarlier we discussed the negatives associated with placingopen stop-loss orders in the market place. Despite thesenegatives, this approach offers one significant advantageover other alternatives. Before unveiling that advantagelet’s first define what a stop-loss order is intended/and notintended to accomplish.The purpose of a stop-loss order is not to enhance theperformance of your system. Likewise, the purpose of astop-loss order is not directly to increase the profitabilityof your trading. The purpose of a stop-loss order is tohopefully minimize your losses on any bad trade enoughso that you can still come back to trade again tomorrow.Nothing more, nothing less. A wise old trader once saidit best when he stated “the purpose of a stop-loss order isto save your sorry assets.”The way to make money trading futures is to stick aroundlong enough to earn enough profits to offset all of theinevitable losses. If your approach to trading stinks, stoploss orders won’t make you a profitable trader. However,if you do have a winning approach to trading the only thingthat can derail you is “that one bad trade” or that seriesof huge losses that knock you out. The only way tosafeguard against huge losses is to use stops to protect yourcapital. And the only way to guarantee that your stop-lossorder will be in the market when it needs to be is for yourstop-loss order to indeed be there.In case you are having trouble reading between the lines,this author advocates the use of stop-loss orders.75
TRADE SECRETS
SummaryIn any endeavor there are certain objectives that must beachieved in order to succeed. Yet before you can eventhink about winning you have to first put yourself in aposition to win. To win a war you must advance yourtroops and take up land. Yet an army that refuses to everacknowledge the order to retreat is unlikely to survive. Towin in auto racing you must be the fastest driver. But aracecar driver who refuses to ever slow down is far morelikely to crash than to win a race. In professional pokeryou need to win a lot of hands in order to make a living.However, a professional gambler who refuses to ever walkaway from the table will eventually lose all of his chips.In the end, risk control will not single handedly win the war,the race, or the game for you. Yet without proper riskcontrol you have no hope of winning. Therefore, the onlyway to win the war or the race or the game is to do whatmust be done in order to ensure your long-term survival.And that is what risk control is all about. Risk control is whatkeeps you in the game long enough to have a chance to win.This is true for any risky endeavor and futures trading isno exception. While cutting a loss and exiting a trade doesnot get you closer to your goal of making x-dollars, it doeskeep you from getting further away from that goal. Thesame holds true for all of the risk control measuresdiscussed in this section. While employing these steps maynot directly put money in your pocket, they do allow youto stay in the game long enough to accomplish yourobjectives. Conversely, refusing to employ effective riskcontrol measures can ensure your long-term failure.76
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
MISTAKE #4:Lack ofDisciplineWhat is Mistake #4Let’s say you are new to futures trading. Or let’s say youhave traded futures in the past without much success andhave decided to start fresh with a new approach and aclean slate. And you’ve done it all and followed every step.You have:• Determined how much money you can truly afford to risk• Opened a brokerage account with that amount of cash• Settled on a diversified portfolio of markets• Developed a trading system in which you have completeconfidence• Developed specific, unambiguous entry and exit criteria• Back-tested your system and have generated goodhypothetical results• Walked your system forward, paper traded it over newdata and have generated good results• Sized your account so that you reasonably expect no morethan a 25% drawdown
77
TRADE SECRETS
• Built in risk controls including stop-loss orders to minimizeyour riskYou’re as ready as you can be. With high hopes and greatanticipation you place an order to enter your first trade.So what happens next? Well, if you are like many tradersthe first three trades you make will be losses. After thefirst loss, you’ll say “no big deal; it’s part of trading.”After the second loss you’ll think “I wonder if I’m doingsomething wrong.” After the third loss you’ll tell yourself“something’s wrong, and I need to regroup.” You willhave no idea why your system has suddenly fallen apart.So you decide to go flat and skip the next signal, a buysignal. Two days later the market that you should be longexplodes to the upside leaving you in the dust. You tellyourself “it’s too late to jump on board now, so I’ll justwait for the next trade,” relieved at least that yourconfidence in your system has been restored. So you waitfor the next signal from your system. And you wait andyou wait and you wait. And in the meantime that marketcontinues to tack on gains virtually every day. Your systemis doing great, but you on the other hand are not doingso well. You start mentally adding the money that youshould have made on this trade to your account and say“I should have this much in my account now.” But everyday your account balance remains the same, while thatmarket just keeps rising higher and higher. By the timeyou enter the next trade you have a missed a $5,000winner. And the next trade is another loser.If you are one of the lucky ones, at this point your loss isrelatively small, you conclude that you are in over yourhead, and you decide that enough is enough. You close78
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
your account and walk away, joining that fateful 90%. Forthe rest of your life whenever the topic of futures tradingcomes up you step forward like a veteran with a purpleheart and tell your “war story:” “yeah, I traded futures,listen to me kid…….”Or maybe you don’t quit so easily. If you are one of theunlucky ones, you keep trading, suffer more indignities atthe hands of the futures markets, and lose even moremoney before your account is finally laid to rest. And soit goes for 90% of the people who enter the exciting worldof commodities speculation.Given all of the potential pitfalls that we have discussed sofar it is easy to understand why the person who decides to“take a shot” and is completely unprepared fails at futurestrading. But what about the trader in this example? Hewas completely prepared both financially and emotionallyto do what was necessary to succeed and still he failed.Why does this happen to so many traders sincerelydedicated to “making it work?” In most cases it is becausealthough they were very well prepared when they begantheir new trading program, somewhere along the way theyfailed to do what was needed. They failed to have thediscipline to pull the trigger (or to not pull the trigger asthe case may be), and they either suffered a loss or misseda huge profit. With many traders this can cause anemotional “domino effect” where the trader’s primary focusis no longer on following his plan to achieve his long-termobjectives. Instead, his primary objective becomes gettingback at the markets for causing him to lose money or fortaking off without him. Or maybe his objective is simplyto get back to “break even” before walking away.79
TRADE SECRETS
Becoming bent on getting even is a perfectly naturalresponse to a kick in the teeth. Unfortunately, it is alsoa sure-fire way to fail as a futures trader.A lack of discipline is defined as failing to do what youshould do in a given circumstance. There is probably nota trader alive, successful or otherwise, who has neversuffered because of his or her own lack of discipline atsome critical moment. What separates those who makemoney in the long run from the other 90% is:• The financial and emotional capabilities to survive a breachin discipline.• The willingness to learn from mistakes and to never repeata mistake already made.A lack of discipline in futures trading is always a mistake.This is true even if your lack of discipline actually savesyou money by skipping a trade or exiting early, or if itallows you to capture a windfall profit by taking a tradeagainst your approach, doubling up on a losing trade orholding on after your trading method tells you to exit.Imagine, you fail to follow your plan and you come outahead. This leaves you ahead financially for the momentbut consider where this leaves you psychologically: “I brokemy own rules and made some money.” All is well and goodin the short run but what happens the next time a criticaljuncture is reached? Do you trust the approach that youspent so much time developing and refining (and which inthe back of your mind “failed” you the last time around,while you, Mr. Supertrader, instinctively knew it was goingto fail so you heroically took matters into your own handsand won the day), or your own “gut” instincts?
80
THE FOUR BIGGEST MISTAKES IN FUTURES TRADING
The most cruel paradox in futures trading is that a trader’sshort-term successes can plant the seeds of his long-termfailure. Believe it or not, one of the worst things that canhappen to a first time trader is to have great success rightoff the bat. In the long run you may actually be betteroff if you struggle a little at the outset, develop somerespect for the markets and weather some early mistakes,than if your first three trades are big winners and youdecide you’ve got “the touch.”
Why Do Traders Make Mistake #4A lack of discipline in trading is almost always the resultof one or more of the three great obstacles to tradingsuccess:• Fear• Greed• EgoEvery time a trader makes a decision regarding any elementof his trading he is subject to the effects of fear, greed andego. This does not imply that we all need hours of serioustherapy. It is simply human nature taking over. We allwant to make money (thus we feel greed) and we don’twant to lose money (thus we feel fear). Cutting a loss isextremely tough on the ego. Once you cut a loss on atrade there is no chance to recoup that loss withoutentering into an entirely new trade. This explains whycutting a loss is often such a difficult thing to do. Howmany people enjoy going around and voluntarily admittingmistakes, especially ones that cost them money? Not verymany. It simply goes against human nature. Yet whentrading futures it is often exactly the right thing to do.81
TRADE SECRETS
These emotions are at times so powerful that they cancause you to do all kinds of foolish things:• You bail out of a trade prematurely with a