Futures trading can be incredibly rewarding but is also fraught with pitfalls that can cost traders significant money. Understanding the common mistakes and knowing how to avoid them is paramount to being a successful futures trader. In this post, we’ll explore the most common mistakes when trading futures, from poor risk management to emotional trading, and provide actionable tips to help you steer clear of these costly errors.
Table of Contents
1. Lack of a Trading Plan
A solid trading plan is the foundation of any successful trading strategy, yet many traders enter the market without a clear, well-defined plan. They may rely on gut feelings or market trends rather than a structured approach.
How to avoid this mistake:
Build a Trading Strategy:
Develop a detailed plan that includes your trading goals, risk tolerance, entry and exit points, and profit targets.
Read about How To Develop A Technical Trading Strategy.
Don’t trade outside of your strategy:
Stick to the plan, even when market conditions tempt you to deviate.
Review and adjust the plan
Not to be confused with on-the-fly adjustments, as making spontaneous exceptions in order to enter a trade that otherwise goes against your strategy is often a bad idea. A periodic review should be done with careful consideration as market conditions evolve.
2. Overleveraging
Leverage allows traders to control larger positions with smaller amounts of capital, but it’s a double-edged sword. Overleveraging can lead to huge losses if the market moves against you, wiping out your account in a single trade.
How to avoid this mistake:
Use leverage conservatively:
Using leverage conservatively means maintaining a balance between enhancing potential returns and minimizing the risk of large, rapid losses. A common guideline is to use leverage no more than 2-3 times your capital. This ensures that you can still participate in the market with larger positions than your capital allows but also keeps your risk manageable in the event of adverse price movements.
A conservative use of leverage also means adjusting your leverage depending on market volatility. In volatile markets, even a small movement can have a big impact, so reducing your leverage in those conditions helps prevent major losses. Conversely, in a stable market, you may decide to slightly increase your leverage, but always within reasonable limits. This approach allows you to capitalize on opportunities without exposing yourself to unnecessary risk.
Example: If you have $50,000 in your trading account, using 2:1 leverage would allow you to control $100,000 worth of assets. If the market moves against you by 2%, your loss would be $2,000, or 4% of your total capital. While this is still a significant loss, it’s far more manageable than using, say, 10:1 leverage, where a 2% market move could result in a $10,000 loss (20% of your total capital).
Focus on risk management rather than maximizing position size:
Many traders are tempted to maximize their position size in order to boost potential profits. However, this approach often backfires, as larger positions come with significantly higher risks. Instead of focusing solely on position size, successful traders prioritize risk management.
A good rule of thumb is to never risk more than 1-2% of your total capital on a single trade. By focusing on risk management, you create a sustainable trading plan that can weather market fluctuations, allowing you to stay in the game longer and achieve consistent returns.
Example: You have a $20,000 trading account and are considering trading crude oil futures. A single crude oil futures contract controls 1,000 barrels of oil, and each $1 price movement represents a $1,000 gain or loss. If you were to trade a position size of five contracts, a $2 unfavorable price movement could result in a $10,000 loss—half of your account—on just one trade.
Understand the risks associated with leverage before employing it in your strategy:
Many traders are drawn to leverage because it offers the possibility of amplifying returns, but few fully understand the risks. A highly leveraged position can quickly turn a small market fluctuation into a catastrophic loss if not managed carefully.
A practical way to manage this is by educating yourself on how much your positions are leveraged and how much price movement is required to wipe out a significant portion of your account. Simulating different scenarios using demo accounts or paper trading can also help you understand how leverage behaves in real-time market conditions without risking your capital.
Example: Imagine you have $10,000 in your trading account, and you decide to use 10:1 leverage, meaning you control a $100,000 position. If the market moves just 1% against you, your $1,000 loss would represent 10% of your total capital. Now, if the market moves 5% against you, you would lose $5,000—half of your account. This example shows how quickly leverage can magnify small losses into large ones.
3. Ignoring Risk Management
Risk management is one of the most critical aspects of trading, yet many traders fail to manage their risk appropriately. Without proper risk control, even a few losing trades can drain your account.
How to avoid this mistake:
Never risk more than 1-2% of your total trading capital on a single trade:
Risk management is at the core of long-term trading success, and one of the golden rules is to never risk more than 1-2% of your total trading capital on any single trade. This means that even if a trade goes against you, your account remains largely intact, and you can continue trading without significant setbacks.
This approach prevents catastrophic losses and ensures that even a series of losing trades won’t wipe out your account. It also reduces the emotional stress of large losses, which often lead to impulsive decision-making.
Example: If you have $50,000 in trading capital, risking 2% on a single trade would mean that the maximum amount you should be willing to lose on that trade is $1,000. You can adjust your position size and stop-loss accordingly to ensure this limit isn’t breached. If you’re trading a futures contract where each point move is worth $50, you might place a stop-loss 20 points away from your entry price, which would cap your potential loss at $1,000.
Use stop-loss orders to protect your capital and minimize losses:
Stop-loss orders are essential tools for limiting your downside risk. A stop-loss is an automatic order that exits a trade when the price reaches a predetermined level. This prevents you from holding on to a losing position, hoping for a rebound, which is a common mistake among traders.
Example: If you bought a futures contract at $2,000 and placed a stop-loss at $1,950, your maximum loss on that trade would be capped at $50 per contract (assuming each point is worth $1). If the market moves against you, the stop-loss order automatically closes your position, minimizing your losses and protecting your capital.
Diversify your trades to spread risk across different markets or assets:
By spreading your trades across different markets or assets, you reduce the impact of a significant loss in any single market. This is because different markets may react differently to economic events, meaning that losses in one market could be offset by gains in another.
Example: Rather than putting all your capital into crude oil futures, you could diversify by also trading in markets like natural gas, gold, or stock indices. If crude oil experiences a sharp decline, you may still have profitable positions in other markets that aren’t as affected by the same events.
4. Chasing the Market
FOMO (Fear of Missing Out) is a common driver of poor trading decisions. Traders often chase after rapidly moving markets, buying into rallies too late or selling during a sharp decline.
How to avoid this mistake:
Stay disciplined and avoid emotional trading:
Emotional trading often arises from fear, greed, or frustration, leading traders to deviate from their strategies and make impulsive decisions. Whether it’s chasing a market move or panicking during a loss, emotions can cloud judgment and result in poor trading outcomes.
More on What Is Emotional Trading And How To Manage It
Wait for the market to come to your predefined entry point, rather than rushing in:
One of the biggest challenges for traders is the temptation to enter trades prematurely, especially if the market appears to be moving quickly. However, successful trading often involves waiting for the market to reach your carefully analyzed and predefined entry point. Rushing into a trade without proper timing can lead to entering at less favorable prices, which can undermine your entire strategy.
Example: Let’s say you’ve analyzed the S&P 500 futures contract and identified a strong support level at 4,200. Based on your strategy, you plan to buy at 4,210 with a target of 4,300 and a stop-loss at 4,180. As the market fluctuates, it drops to 4,220, and you start feeling anxious, wondering if the market will rebound before hitting your entry point. You might be tempted to jump in at 4,220, but this would mean buying before your strategy has confirmed the trade.
Use limit orders to ensure you enter trades at prices you’re comfortable with:
A limit order allows you to specify the price at which you’re willing to buy or sell an asset. Unlike market orders, which execute at the current market price, limit orders will only execute if the asset reaches the price you’ve set, helping you avoid overpaying or entering a trade at a suboptimal level.
Example: Suppose you’ve analyzed gold futures and decide you want to enter a long position if the price drops to $1,950, but the current price is $1,975. Instead of constantly watching the market and manually entering the trade when the price falls, you place a limit buy order at $1,950. If the market reaches that price, your order will automatically execute, ensuring that you only enter the trade at a level you’re comfortable with.
5. Poor Timing and Execution
Even if you’ve correctly analyzed the market, poor timing can still lead to losses. This could mean entering or exiting trades at the wrong time due to hasty decisions or a lack of understanding of market dynamics.
How to avoid this mistake:
Study market cycles and learn to recognize the optimal times to enter and exit trades:
Markets generally move in cycles—phases of expansion, contraction, and consolidation. By studying these cycles, traders can better anticipate potential market moves and time their entries and exits. Knowing when the market is overbought (prime for selling) or oversold (prime for buying) can dramatically improve trading performance.
Example: Let’s say you’re trading the crude oil futures market. Through your research, you learn that crude oil typically has seasonal cycles. Demand may peak during the summer months due to increased travel and taper off in the winter. Understanding this cycle, you can plan to buy oil futures when demand is low and prices are oversold in late winter, then sell when demand peaks in the summer.
Practice patience—sometimes the best action is no action at all:
It’s tempting to constantly be in the market, but sometimes the best decision is to do nothing at all. Markets can often be choppy or range-bound, presenting few clear trading opportunities. In these situations, taking no action and waiting for more favorable conditions can protect your capital and avoid unnecessary risk.
Example: Imagine you’re monitoring the S&P 500 futures market. The market is stuck in a tight range, moving between 4,200 and 4,250 without clear directional bias. Instead of forcing a trade in this uncertain environment, you decide to wait for a breakout above 4,250 or a breakdown below 4,200 to confirm the next trend.
Use tools like moving averages or other technical indicators to help identify ideal entry and exit points:
Technical indicators like moving averages (MA), the relative strength index (RSI), and moving average convergence divergence (MACD) can help traders identify trends and potential entry and exit points. These tools offer objective data that can validate your trading decisions, preventing emotional biases from driving your trades.
Example (MA): On the NASDAQ futures market you notice that the price is trending upward. You decide to use a 50-day simple moving average (SMA) and a 200-day SMA to help identify an optimal entry point. When the 50-day SMA crosses above the 200-day SMA (a bullish crossover), it signals that the trend has shifted upward, giving you confirmation to enter a long position. You wait for the market to retrace slightly toward the 50-day SMA, then enter your trade at a favorable price. By using the moving averages as confirmation, you avoid entering the trade too early or at an unfavorable price.
More on RSI, MACD And MA Indicators
6. Overtrading
Overtrading occurs when traders place too many trades in a short period, often driven by the need to recover from losses quickly or capitalize on market fluctuations. However, overtrading can increase transaction costs and expose traders to unnecessary risk.
How to avoid this mistake:
Limit the number of trades you make based on your trading plan:
By limiting the number of trades you make, you ensure that each trade fits within your predefined strategy and risk management rules. This prevents emotional or impulsive trades, helping you focus on quality over quantity. Sticking to your trading plan also helps avoid unnecessary fees or commissions that can eat into your profits.
Focus on quality rather than quantity—wait for high-probability setups:
High-probability setups are trades where the risk is lower, and the potential reward is higher. Waiting for these setups requires discipline but can lead to more consistent profitability. While waiting might mean taking fewer trades, the ones you do take are likely to be more successful because they are based on a proven strategy.
Set a daily or weekly limit for the number of trades you will execute:
Setting a limit on how many trades you can execute in a day or a week helps prevent overtrading and ensures that you stay within the boundaries of your trading plan. This limit forces you to be selective with your trades, avoiding low-quality setups and reducing the emotional toll of constant decision-making. It also helps prevent fatigue and the tendency to make mistakes when trading too frequently.
This daily limit keeps you disciplined, and even if you hit a losing streak, it prevents you from digging yourself into a deeper hole by taking unnecessary risks. Similarly, if you hit your daily profit target early in the session, your trade limit allows you to stop trading for the day and lock in those gains, avoiding the temptation to keep trading and risk losing what you’ve already made.
7. Letting Emotions Drive Decisions
Emotions such as fear, greed, and hope can cloud judgment and lead to irrational decisions. Emotional trading can cause traders to hold onto losing positions for too long or exit winning trades prematurely.
How to avoid this mistake:
Develop a trading routine and stick to it regardless of market conditions:
Having a consistent trading routine is key to maintaining discipline, especially during volatile market conditions. A well-structured routine helps you approach the market methodically, rather than reacting emotionally to price swings. This routine should include activities like reviewing your trading plan, conducting pre-market analysis, checking for news or economic events, and setting up trades based on your strategy.
Practice mindfulness or meditation to stay calm and focused during trading sessions:
Trading can be emotionally intense, especially when large sums of money are at stake. Practicing mindfulness or meditation can help you stay calm, reduce stress, and improve focus during trading sessions. Mindfulness techniques allow you to stay present, avoid impulsive decisions, and better manage emotional highs and lows, such as excitement after winning trades or frustration after losses.
Maintain a trading journal to reflect on your emotional responses and work to control them over time:
Recording not just the technical aspects of your trades (entry/exit points, reasons for the trade, outcomes) but also your emotional state (how you felt when entering or exiting the trade) helps you identify patterns of emotional behavior, such as impulsivity, fear, or overconfidence. Over time, you can use these insights to control your emotions more effectively.
8. Neglecting Market Research
Many traders jump into trades without conducting thorough research or understanding the underlying assets they are trading. This can lead to poor decision-making and unexpected losses.
How to avoid this mistake:
Stay informed by reading market news, analysis, and reports from trusted sources:
Staying informed is crucial in trading because market-moving events—such as economic data releases, geopolitical developments, or corporate earnings—can drastically affect asset prices. Traders who stay up-to-date with the latest market news and analysis are better equipped to make informed trading decisions and avoid unexpected price swings caused by news events.
Example: Suppose you’re trading gold futures. By following trusted news sources, you learn that the Federal Reserve is planning to announce its interest rate decision soon. You know from past analysis that interest rate hikes often lead to lower gold prices, as higher rates make bonds and other interest-bearing assets more attractive compared to gold. With this knowledge, you might choose to close or reduce your long position in gold before the announcement to protect your capital.
Perform technical and fundamental analysis on any asset you plan to trade:
Technical analysis involves studying price charts, patterns, and indicators to predict future price movements, while fundamental analysis involves evaluating economic, financial, and qualitative data to assess an asset’s intrinsic value.
See our article on Combining Technical and Fundamental Analysis
Use trading platforms that offer research tools, such as news feeds or economic calendars:
Trading platforms with integrated research tools, like real-time news feeds or economic calendars, provide traders with critical information that can influence their trading strategies. Economic calendars highlight upcoming events like interest rate decisions, employment data, or corporate earnings, which often cause significant market movement. News feeds provide live updates on market developments, helping traders stay informed in real time.
9. Holding Losing Positions Too Long
It’s common for traders to hold onto losing trades in the hope that the market will eventually turn in their favor. However, this can lead to significant losses if the market continues to move against you.
How to avoid this mistake:
Set and adhere to stop-loss levels on every trade:
Setting and sticking to stop-losses is essential for risk management because it prevents small losses from turning into large ones. It also helps you remain objective, avoiding the temptation to “hope” that a losing trade will turn around.
See also Effective Stop-Loss And Take-Profit Strategies
Accept losses as part of trading—learn from them and move on:
Losses are inevitable in trading, but how you react to them can determine your long-term success. Accepting losses as a natural part of the process, rather than trying to avoid them at all costs, helps you keep a balanced perspective. What’s important is learning from each loss and avoiding the trap of letting one bad trade define your entire trading strategy.
Review and adjust your trading plan to prevent holding onto losing positions for emotional reasons:
A well-thought-out trading plan outlines your strategy, risk management rules, and goals. Periodically reviewing and adjusting your trading plan helps you prevent emotional decisions, such as holding onto losing positions in the hope that they’ll recover. If your plan is solid and you stick to it, you’re less likely to make decisions driven by emotions like fear or greed.
10. Failing to Adapt to Market Changes
Markets are constantly evolving, and a strategy that worked yesterday might not work tomorrow. Some traders fail to adapt to changing market conditions, sticking to outdated strategies that no longer deliver results.
How to avoid this mistake:
Regularly evaluate and update your trading strategies based on current market trends:
Market conditions are constantly changing due to factors like economic policies, geopolitical events, or shifts in market sentiment. What worked as a successful trading strategy in the past may not work in the current environment. Regularly evaluating and updating your strategies ensures they remain relevant to the prevailing market conditions and helps you avoid losses caused by outdated approaches.
Read more about Adapting Your Trading Strategy For Different Market Conditions
Stay flexible and open to trying new approaches or tools:
Markets evolve, and so should your approach. A strategy that worked in a bull market may not work in a bear market, so adapting to new tools or approaches ensures you stay ahead of market shifts and can exploit new opportunities.
Example: You’ve primarily used simple moving averages (SMAs) to identify trends in your forex trading. While this worked well in a trending market, you find that in more volatile conditions, the SMAs are too slow to react, causing you to enter trades late and miss key moves. In response, you decide to explore other tools like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator.
Consider backtesting new strategies on historical data before applying them in real-time markets:
Backtesting involves applying a trading strategy to historical data to see how it would have performed in the past. It’s an essential step before implementing a new strategy in live markets, as it gives you a sense of how the strategy behaves under different market conditions, including periods of high volatility, downtrends, or flat markets. Backtesting allows you to refine your approach and minimize the risk of losses when trading live.
Read more about Backtesting Strategies With Historical Data
Conclusion
Avoiding these common mistakes in futures trading requires discipline, patience, and a continuous effort to improve your strategy. By recognizing and addressing these errors early, you can greatly increase your chances of long-term success in the futures market.
Read more about the costly mistakes of trading futures in this post from Wealth and Money:
Top Ten Futures Trading Mistakes And How To Avoid Them – Wealth and Money (wealthmoney.org)
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