Becoming a Successful Futures Trader

Futures trading, like all forms of trading, does require proper preparation, which means that you have to be ready to trade profitably before you can expect to do so. Not paying proper heed to this first step is the undoing of the majority of traders, the great majority in fact.

When we look at the failure rate of traders, and we see that only about 1 in 10 new traders succeed in becoming profitable long term, something is amiss. This failure rate is not particular to futures trading, as we see it with stock trading as well and any other form of trading that one is looking to master.

Becoming a Successful Futures TraderWe might take from this that trading is this difficult that so few succeed, and although becoming a successful trader is a fairly long process that does require a certain level of effort and talent, it is nowhere near as difficult as these statistics would suggest.

There are a number of reasons why traders fail, but the biggest and most significant one is that they come to trading too unprepared and too unproven. Traders most often grossly underestimate the challenge here, and while the challenge is by no means great, there is one, there is a learning process involved.

If someone comes to futures trading with little or no experience, little or no knowledge of how to trade properly, and little or no idea of what it takes to be successful, it is too much to expect that one is going to just hit the ground running and start making money right away.

Instead, there are lessons to be learned, and skills to be mastered, and this either is going to require one typically go through a phase where one incurs significant losses on their journey toward becoming good enough.

The Virtue of Patience

The much higher leverage of futures trading, especially combined with the poor money management that newer traders tend to have, along with small to quite modest amounts of money to trade, and little to no preparation, is simply a recipe for disaster. You are not signing up to be the 1 in 10 that succeeds, even if you are pretty talented, you are instead enlisted in the 9 in 10 that fail, and failure usually comes pretty quick.

We may wonder why traders who honestly have little to no track record in demonstrating that they can handle futures trading and not lose money at it would ever attempt such a thing, but this happens all the time, and is the norm with newer traders.

It is not that we need an extreme level of confidence and a rock solid history of trading futures profitably to be in a good position to start trading futures with real money, but we at least need a reasonable expectation of this to be ready to start. It is very unusual that a trader would wait until they had a reasonable expectation of profit, which means that their expectations are unreasonable, and that’s simply not using your head.

Successful futures trading and all trading is purely a mental skill, and one’s success is purely a matter of mental ability and the quality of your thinking. If you start out thinking foolishly like this, you cannot expect anything but failure, nor do you deserve anything else.

We must first prepare ourselves sufficiently before we should ever consider trading anything for real money, especially futures. Trading futures certainly looks easier than it actually is, and even though it’s really not that difficult to come up with a successful plan to trade, you do need one first, and one that you can at least reliably rely on.

This does not mean just placing a couple of trades and seeing them make money and then deem yourself to have any sort of proven ability. It also does not mean spending years paper trading until you are close to absolutely certain you have what it takes. The proper amount of training is enough, not too little or too much, where you are likely to succeed. This is not something we can afford to guess at.

Managing Risks Properly with Futures Trading

This is especially the case given that there is no minor leagues with futures trading, like there is with CFD trading for instance. If one is trading with a futures broker, you’re in for a full lot or mini lot, there are no quarters or tenths or hundreds of a lot that can be traded like there is with contracts for difference orders.

Depending on the amount of trading capital one has, this can mean that one is simply not funded enough to even take a reasonable shot at trading with a futures broker, and this is very often the case in practice with new traders in fact.

This has more to do with their not understanding how to manage risk and in particular, the greater need to do so when one does not have a solid track record or understanding of how much risk they can reasonably take on.

If you are putting up 5% or 10% of a position as a deposit, and you want to stay in the game for any length of time, you better have an idea about what your drawdowns will be, and there is always drawdowns no matter how good of a trader you are. This is how risk with futures trading comes home to roost, and what we need to pay the most attention to.

The idea here is to be able to withstand these drawdowns without their having too much of an impact upon our trading, including of course going broke and not being able to trade anymore.

To do this, we first need a trading strategy which has a positive expectation. Once we get that, we next need to conduct ourselves such that this positive expectation can play out over time without our getting hurt when the advantages expressed in probabilities of success get distributed against us over a certain period of time.

Starting out, we only will have a vague idea about how drawdowns will affect us, so we need to be erring more on the side of caution rather than not. To do so, we need to limit the risk we are taking per trade relative to our account size.

A rule of thumb that many successful futures traders use is to never risk more than 1% of their account balance on a trade. These are very experienced and proven traders though, so someone of less trading stature and experience should be using less than this, perhaps only half a percentage or even less if one is less confident.

Having A Successful Plan and Executing it Successfully

What should stand out for many newer traders is that they often simply do not have the capital for this, to be able to reasonably manage their trades and have stops that will get them out this quickly if the trade goes against them. We don’t want our stops so tight that we just get whipsawed too much, and while one may trade successfully with very tight stops, they have to fit the strategy and cannot simply be used arbitrarily.

Designing a trading plan always starts with the trading ideas, independent of any stops, and we then look to apply risk controls to ensure that the desired amount of risk in a trade is not exceeded. We can’t simply say that we are only going to risk a certain percentage of our capital on it and superimpose that constraint upon the trade because this often will turn the trading strategy into a bad one.

We can design our plans around our need for risk management though, for instance with seeking positions that are only held shorter term to limit the amount of room they must be given to play out properly. This isn’t something we can just choose if we wish, it is a must.

The first task for a new trader is to come up with a successful means of predicting price movement well enough, as this is the foundation of profitable trading, knowing how to trade profitably. Once one gets this in place then adjustments can be made as far as length of time these strategies are pursued, which are going to provide us with exit strategies that conform to the plan and yield profits.

Stop losses are only there to protect us from going beyond these levels of losses, when the market moves against us too quickly and especially when we’re not watching our trades.

Once we have this all in place, we can never be completely confident that things will go well for us, but we at least need a reasonable level of confidence, and this is why it’s better to wait until we have this before we ever trade with real money, especially with futures trading.

Having a good trading plan is one thing, being able to execute the plan properly is quite another. Trading with real money generally invokes much more pressure and stress than trading with fictional money, where both gains and losses are real. Traders tend to stress about both, and stressing about gains and ending up closing trades too soon is a common problem as well.

Mastering one’s emotions is a key and necessary element of successful trading, and with the much more leveraged swings that futures trades provide, this is especially important when trading futures. It is not a matter of just suppressing these emotions, one must develop the proper level of understanding to let the plan dictate one’s moves and know that letting one’s emotions do so is simply a terrible idea.

Successful traders do experience levels of emotions as well, they just don’t let them affect their trading. Many of these traders do trade fearfully, although their fear is not following their plan, and this is a much more appropriate thing to fear when trading.

Over time, as one becomes more and more confident in one’s trading plan, this tends to go away, but the focus always needs to be not on what is going to happen with this trade, but what will happen if we trade a certain way over time. If this means letting our emotions have us trading badly, bad trading just leads to bad results.

It is nowhere near as difficult to become a successful trader, and even a successful futures trader, as some people think. It does not necessarily require a great deal of talent or years of training. With some people though it might, and with some people they simply may not have what it takes to succeed.

The way to find this out isn’t with a real money account with a futures broker, where you are likely to just become another statistic that busted their accounts and left the game. There are certain things that you can only learn by trading real money but you need to make sure that the things you need to learn before that are mastered well enough.

This won’t assure you of any success but it will at least get you on the right road to it.

Eric Baker


Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

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Areas of interest: News & updates from the Commodity Futures Trading Commission, Banking, Futures, Derivatives & more.