The Psychology of Futures Trading

Today’s derivatives markets are full of opportunity, as well as risk. Price volatility can cause rapid and significant swings in asset prices, and sometimes longer-term trends develop that can continue for weeks, months or even years.


There’s nothing like establishing a long position in a market, and then riding that position higher and higher. On the other hand, getting caught on the wrong side of a large or sudden move can hurt. Losing trades are a big part of the game, however, and it is therefore imperative that traders learn to handle both the highs and the lows of modern futures trading.


Ask many of the world’s most successful traders and investors what the biggest key to their success is, and you will likely get the same answer: The key to success is learning to handle the psychology of trading. Although traders may always be on the outlook for a trading “edge,” or use other means to try to predict price action, the fact is that no one, no one, knows what the market will do next.


It stands to reason then that if a trader cannot control the markets, he or she must learn to control themselves in order to be successful.


There are times when trading may appear easy, and profits seemingly present themselves with little effort. There are also times when trading is extremely difficult, when the trader can’t seem to buy a winner. The inevitable winning and losing streaks that are a part of trading must be dealt with while maintaining a state of mind that is suitable for a business that can have so many ups and downs.


While a discussion about trading psychology could easily encompass an entire book, the ability to stay in the right frame of mind for any trading endeavor boils down to two things: Planning and discipline.


Planning involves every aspect of a trade. This can include how trade signals are generated and what signals may be taken. It should also include risk management techniques such as stop-loss points and orders. In addition, scaling of positions should be planned out in advance. Planning all the moving parts involved with a trade can help ensure that the trader does not make decisions based on emotion and can help eliminate overtrading.


Discipline is the hard part. Regardless of how good a trader’s plan may be, any plan will be rendered worthless without the discipline to stick to it. Moving stop orders, trading too much size and overtrading are all hallmarks of the undisciplined trader. These issues all have a tendency to blow out accounts as well. Disciplined traders, on the other hand, have the ability to stick to their plan, entering and exiting as their plan dictates. They do not allow emotion to make trading decisions for them, and look to remain objective at all times.


Trading is as much about psychology-if not more-than anything else. Those who are able to handle the roller-coaster of emotions and remain objective have a much greater chance of success than those who are unable to do so. Successful traders recognize the importance of psychology in trading and do one major thing that unsuccessful traders do not: They plan their trade and trade their plan at all times.


There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.