The Psychology of Futures Trading

Whether you are a fundamental or technical trader, futures traders, in aggregate, combine together to form a huge psychological force that moves the futures markets. Successful traders understand the importance of psychology in futures trading. Most futures traders lose money. They lose because they lose their discipline, abandon their systems, move stop loss orders around, add to losing trades and ignore the mass psychology present within the markets. The markets do not beat the traders – the traders beat themselves. In summary, emotional, undisciplined and thoughtless trading results in losses.

So why do people trade futures if it is so difficult? There are many answers to this. Trading appears to be deceptively easy. It’s can appear to be like playing a video game. When futures traders make a little money, they tend to develop a false sense of confidence. This is the beginning of their demise. Futures trading offers the ability to make a lot of money in a short period of time, with very limited barriers to entry. People equate this with retirement, mansions, yachts, vacations and many of the material things that come along with financial success. In essence, money equals freedom.

If you are a good futures trader, then you trade on your own hours, you have no boss and you come and go as you please. These are some of the psychological facets that attract people to futures trading. But why is it so difficult to succeed at futures trading?

It is difficult because one component of futures trading requires self control and discipline at a personal level. Since this self-control is very personalized, there is no simple way of teaching other futures traders how to master their own psychology and self control. What works for one futures trader might seem absurd to another. For example, I have heard stories about traders that put visual queues up in their trading rooms – a blue arrow pointing up means they only take trades from the long side of the market. A red arrow pointing down indicates that only short trades should be taken. Some futures traders would ridicule this or refer to it as being silly or trite. Well to each his own – if it works, then so be it.

Others, in an attempt to control their emotions and impulses, have been known to decorate their computer terminals with yellow sticky notes, scribed upon them common reminders, such as, “ride winners and cut losses, never move your stop, the trend is your friend”, etc… What does this tell us? We can conclude that there is something unique about each successful futures trader – this uniqueness is the way in which they have mastered their own personal discipline, self control and psychology.

Futures trading is tremendously fascinating. However, we already know that it is extremely difficult to be a successful futures trader over a long period of time. Success can be defined as consistently high returns with minimal peak to valley draw down in equity. Futures trading attracts puzzle solvers and can be likened to Sudoku, Chess, Kikuru, Crossword Puzzles all rolled into one massive brain-teaser. Maybe you can combine that with some Poker or Black Jack. Together, you have a whole lot of psychology wrapped up into one big challenge – futures trading.

If you look at those people that win in futures trading, you will not necessarily see a group of geniuses. You will find that successful futures traders have most likely mastered three critical elements of futures trading. 1) They have a logical trading system; 2) they have a solid money management plan, and; 3) they have mastered individual psychology.

Individual psychology consists of such emotional components as fear, greed, jubilation, unrealistic expectations and despair. Volumes have been written about trading plans or black box systems. Many books have been written about money management. However futures trading is unique in that it requires one to master individual psychology. This third component to being a successful futures trader – mastering individual psychology – must be conquered; however you will not learn to conquer it by reading a book, subscribing to a news letter, or by following a market guru.

Futures trading can cause an individual to self-destruct, much like other forms of self destruction, such as gambling, alcoholism and drug addiction. A trader must be in complete, utter control of emotions, 100% of the time.

It is okay to feel upset about a loss, or to feel happy about a winning trade. Self-destruction (blowing out a trading account) can begin with a losing trade or with a winning trade. A losing trade can graduate into a series of self-destructive actions – over trading, emotional trading, adding to losers, riding losers, to name a few. Winning trades can toss a trader into a pool of dangerous psychological waters – false confidence, feelings of being invincible, over-trading or trading too much size – all of these psychological components can affect a winning futures trader.

To summarize – it is very difficult to be a successful futures trader. However, if one can conquer their own personal psychology, one can be a successful futures trader. There are thousands of plans, ideas or systems that can be stuffed into a black box or algorithmic trading program. These can be optimized and tested over and over until the futures trader is confident in the system. Solid money management principles – proven principles used by the most successful investors – can be incorporated within a solid trading system. However, as the theme of this article suggests, success will not be found until the futures trader is able to conquer, master and control their emotions and psychological mindset, 100% of the time.