One constant in trading is that there is no “magic bullet”; no one system, analyzation technique, or strategy that can guarantee success. There are however, tools and approaches that can help improve your odds of profitable trading. One tactic I like to employ I call the “Five Trade Approach.”
Traders can categorize all of their trades into one of five categories: big winners, small winners, small losers, big losers, and break even trades. I work with traders to define these categories based on their account size and trading style, but the approach works with traders of all disciplines. Once they think of their trades in these terms, we work to remove just one of these categories, big losers, from their repertoire. Traders who can successfully remove this category greatly improve their chances of profitability. In fact, it’s possible to be successful without a majority of their trades being winners.
While this trading process sounds great in theory, it is easier said than done. In order to eliminate big losers, one must implement what every successful trader, big bank, or fortune 500 company has: consistent and effective risk management. There is a reason that big banks and some of the most successful companies in the world all employ a cadre of risk managers: they realize that one bad investment could destroy their whole company. Having lived through the MF Global bankruptcy, I experienced this fact first hand. Similarly, without effective risk management, one bad trade can easily destroy your futures and options trading account. Both technical traders and fundamental traders have seen markets do things they didn’t expect, so no matter your approach the need for risk management remains the same. I advise my clients that before making any trade, they set risk parameters on their trades, and then help them enforce that parameter if need be. With effective risk management, planned out prior to trading and adhered to with discipline, traders can eliminate big losers and greatly improve their chances of success.
For more information about this article, please contact me at 312.242.7978 or via email firstname.lastname@example.org. I look forward to hearing from you. Thank you.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can be substantial. Past results are not indicative of future results or performance. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. Research analyst does not currently maintain positions in the commodities specified within this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.