This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
After reading TapeWorm’s thoughtful post on trading futures, I felt the urge to offer up my response.
TapeWorm’s main premise is that trading futures is no different from trading stocks in the sense that the chart patterns that exist in stocks also show up in the various futures markets. I do not disagree with this rationale, since I have seen an example of it with my very own eyes. Finding a valid setup, waiting for the confirmation, picking your entry level, selling when it hits your profit objective or stop - in trading futures, these are done no differently than when trading stocks. So, this aspect of futures trading itself, is no harder nor easier than equities trading.
However, TapeWorm also pointed out one difference between trading futures and trading equities, and that is leverage. How this additional leverage is used inevitably ties in with trader psychology. As for the psychology behind futures trading, well, I would say it is similar, yet different at the same time. It is similar in the sense that similar chart patterns exist in both types of trading, but different in the sense that the added leverage magnifies everything a bit. From my point of view, the additional leverage from trading futures actually makes a big difference. I would imagine that Forex trading is different as well because of this leverage aspect. Let me explain with a couple of examples….
In Equities Trading, I could get away with using mental stops, if you are looking for a specific setup, have a specific price objective and a specific timeframe in mind. However, you just wouldn’t be able to get away with using mental stops in Futures Trading. Mental stops won’t work at all, and I know because I’ve tried! I don’t have any hard data to back this up, other than showing you my trading statement containing losing trades from when I used mental stops.
I also had problems with patience, discipline, revenge trading, and overtrading when I was trading Equities, but somehow, I managed to sweep them under the carpet and not have to really deal with those problems. If I overtraded on a stock, I would somehow make up for it the next day or two by finding a different stock that went in my favour. However, the additional leverage that comes with trading futures shone a painful spotlight on these problems that cannot be ignored. Ignoring your problems just isn’t an option. Period. You are trading the same contracts, the same markets, and there is nowhere to run, nowhere to hide from your problems. You must come face to face with your trading weaknesses, and find a way to address them or “die.”
I guess what I’m trying to say is that it inevitably all boils down to the psychology behind trading, and that, in my opinion, is what makes futures trading different, and perhaps, harder.
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
May 3rd, 2007 at 6:35 pm
Yup, I would agree with both Phileo and Tapeworm if you are doing technical trading. Looking at the chart, there’s not much difference. You can play your favorite breakouts, box plays, triangles etc.
The difference and the challenge is the power/disaster of leverage. This applies for both Futures and Forex. Manage it and play it well, you are building your account in rocket speed. Fooling around, you will remember it for life.
Do you prefer beer or vodka?
May 3rd, 2007 at 10:49 pm
gav: beer
phileo: very true…i know how to drive, but if i was dropped into the daytona 500 during a race, i guess it would impact my decision making capabilities…great post