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A Few Good Ways to Lose Money Trading the Futures Markets

E.L. Thorndike, the father of American learning psychology, noted that there are literally thousands of wrong behaviors and only relatively few right behaviors. His point was made in reference to the use of punishment as an aid to learning. While some new behaviors may be taught with punishment, the use of rewards for appropriate behaviors gets faster, better, and longer-lasting results.

Although there are many ways to lose money in the markets, there are only a few ways to make it - and even fewer ways to keep it. While traders collectively spend millions of dollars every year attending seminars and buying books, tapes, and trading systems, they focus little energy on learning behaviors to facilitate success. Why? Because the rules of trading systems, methods, and indicators are specific, often objective, and frequently require nothing more than rote memorization. In other words, they're easy to learn and easy to apply.

Behaviors that contribute to success, on the other hand, are often intangible, somewhat subjective, situation-relevant, and individual-dependent. No hard-and-fast rules apply to every trader. Frequently, traders are not in touch with the problems that require remediation. Not knowing what to change, they will surely be at a loss for techniques to help them make changes.

Perhaps my backdoor approach will be sufficiently unorthodox to get you started. Ignoring Thorndike and other outstanding behavioral psychologists, I'll tell you what you may be doing wrong. In so doing, I hope to break the monotony of do-this and do-that rules - ones often heard that somehow fail to find their way to the cerebral cortex. Here, then, are some good ways to lose money in the futures (and stock) markets.

Plunge Headlong into the Market without a Plan of Action

This is an excellent way to lose money and lose it quickly. Why make a plan anyway? If you trade without a plan, your chances of success are slim to none. You may be one of the lucky few who hits it big the first time, but the odds of doing so are rrdnimal. Without a plan, you will find yourself buffeted by the winds of chance, the opinions of others, the persuasion of newsletters and advisors, the pandering of brokers, and the bias of the media. Your responses will be whimsical. But the greatest danger is that you will not learn anything from your behavior. If you are unaware of what you did wrong, the consequences of your actions will not be readily apparent to you. And you may run out of money before you learn your lessons.

But what exactly do I mean by a plan? Is it a trading system? A schedule? A set of rules? I define a trading plan as:

A system or set of indicators that will permit relatively objective evaluations of market entry and exit as well as risk management.

This could mean that you are following a computerized trading system, signals from a chart book, a newsletter, astrology, a random-number generator, the I Ching, or your broker. Regardless of the source, the input must be treated as relatively unalterable and followed as closely and as often as possible. For some traders, I advise against rigid adherence to any system. Some traders cannot blindly follow a totally mechanical system. I suggest instead employing a relatively mechanical trade entry system and a more flexible exit system (to be discussed later on). In other words, I advise against rigidity, against inflexibility, and against blindly following any plan. However, to stray from a plan intelligently, you must have a plan at the outset.

There are various levels of adherence to a plan. Every trader must find his or her own level of comfort in deviating from that plan. Some traders will feel uncomfortable with only a minor deviation from the course, while others will be able to tolerate wide variances from their plans. You alone can determine the right formula by trial and error.