The 7 golden rules for option trading successfully29 comments
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This article is the Opinion of Optimus Futures. However, there is an alternative school of thought that labels this conservative approach as a likely reason that may potentially be compromising their progress. Many traders starting out their trading career often fail to treat it like one. Trading in the financial markets is a demanding long-term profession that rewards those with a relentless thirst for knowledge as well as adequate capitalization.
Just as one cannot go out investing in real estate with pocket change, a tiny futures account with a broker will not necessarily help their chances much either. This is because success in trading perilously hinges on the ability to control emotions, and the magnitude of those emotions are directly correlated with the capital that is on the line.
Just as there is a world of difference between paper trading futures trading demo account and live trading , there is also a massive difference between trading a large account and trading a small account.
One of the best arguments put forward in favor of small futures account trading is; Practice! This applies more to beginner traders who are not comfortable going all in and want to get the feel of trading with live money without putting much on the line. They will often give themselves a timeline or a profit target before they commit going in with their full capital. Unfortunately, this serves as a poor launchpad for traders still on a learning curve. As stated above, trading successfully has a lot to do with controlling and using emotions in a conscious and disciplined manner.
Psychologists confirm that the pain of losing money is felt by the same part of the brain that feels actual physical pain. The emotions of hitting a profitable trade versus a losing one will never be the same on different sized accounts. The loss has a much more significant impact psychologically and could present a hurdle for progress or serve as a deterrent from further education and in some cases, trading in general.
A better approach instead, is to open an account with adequate capital appropriate for the asset class of Futures. This may allow one to potentially refine risk management skills to ensure that a futures trading account does not go into a drawdown that forces you to stop trading altogether.
This will allow the Futures trader to scale up the risk per trade, so a few accumulated losses will not substantially deplete the equity in the account. Futures trading is volatile and leveraged, and as such, requires a specific utilization of risk and cash management. Neither should they trade more frequently in hopes of recovering losses that have already occurred.
You need to decide what is your risk capital. There is a substantial risk of loss in futures trading. We discussed above that making or losing money on a small futures account is never reflective of the emotions you would feel for the same trades on a larger account.
This dilemma in itself carries enough might to bring down your trading performance. Once again, it is human psychology at play here. The high degree of leverage that is often obtainable in commodity interest trading can work against you as well as for you.
It can be ridiculously hard to train your mind not to translate your trading decisions into actual dollar terms. How much we make or lose will ultimately drive our feelings and emotions about our trading progress. Even though past performance is NEVER indicative future results in terms of trading, the same cannot be said for your emotions, especially for new traders.
And this is where larger account traders may have an edge. If for example, you have one running trade accounting for half of your account balance, you are bound to be heavily burned by trading psychology. The outcome of that one trade will most certainly impact your next one. Over time the dollars over numbers phenomena can also start affecting the trading frequency rhythm.
They often want to be more involved and want a higher number of winning trades in an effort to force the equity curve to tick higher. This tendency can result in increased frequency of trades, often at the expense of the quality of trade setups.
Unfortunately, there are no shortcuts. Under-capitalized traders have a steep climb if they choose to fall into the potential trap of wanting to grow their futures account overnight. This is because not only do they face the above-mentioned perils of trading with smaller accounts, they also carry with them the fear of having to lose that money.
In fact, having to avoid the disturbing thought of losing their full capital is precisely why overly cautious traders sometimes end up trading a futures small account in the first place! Professional traders often advise aspiring traders with limited trading capital to transition to full-time trading slowly over time rather than try their luck at growing a small account into a larger one.
This means that they focus on their career, while at the same time learning the markets in order to potentially make better trading decisions in the future. As they accumulate more risk capital, they can potentially put it to work in the Futures market. You stand a comparatively better chance of succeeding in this business if you walk in with adequate capital.
The key here is discipline, which in our opinion is a trait that is priceless in the world of trading. And while it is an instinctive approach taken by many beginner traders, quite often it is rather challenging from a psychological perspective and even harder to implement into a healthy long-term strategy owing to the leverage and volatility in the Futures market.
However, before we wrap up, it is important to note that while we highlight the difficulties and the potential problems traders can face when they trade small accounts, we do not claim that growing a small account is impossible nor do we discourage anyone from opening one. We are simply pointing out the realities you should be prepared to face if you decide to step into the world of futures.
Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions. About Optimus Futures Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.