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Part III – The Four Biggest Mistakes by Traders: Failing to Control Risk

This is part three of a five part series of the four biggest mistakes traders and investors make which costs them time, money and usually self-confidence when trading stocks, ETF’s or futures trading strategies.

The Four Biggest Mistakes

1. Lack Of A Trading Plan – Part I

2. Using To Much Leverage – Part II

3. Failure to Control Risk

4. Lack Of Self-Discipline

 

Mistake #3 – Failing to Control Risk

If you were to engage in something risky like skydiving, you or a team would check your parachute to be sure its packed properly, strapped on to your body correctly before you jumped out of the plane. If for some reason you were not told how to use the gear, like when to pull the ripcord etc… I guarantee you would ask them before you threw your body out of the plane.  There is a real fear of dying so you naturally make sure you are in control of what you are about to do so your risk is managed and live another day.

But when it comes to trading this is not the case and you and I both know a good part of why. We all know people who have said rude things, quit jobs or broken up with a girlfriend or boy friend over the internet (email/text message). Let’s face it, it’s easy to be brave online and do things we would never really do in person. Heck, some of the emails I get from readers of my free weekly articles I post are so rude and some are threatening that all I can do is laugh. Because I know these people would likely never say the things they did to someone they have never met, and do it to their face all because they think my FREE short term market prediction does not fit their bias. I think you get the point here…

So when it comes to trading individuals get this what I call “Online Courage” and this is why so many fail to protect their capital when trading. They simply don’t see their money so it does not feel at risk (out of sight is out of mind). This lack of fear is what leads to loss of risk control.

I talk a lot about controlling risk in my new book “Technical Trading Mastery – 7 Steps To Win With Logic” Special Offer & Free Lifetime Subscription Expires Jan 1st!

7 Steps To Win With Logic

How to Avoid Mistake #3

There area few things that can and should be done to control your overall risk when trading. The first one is diversification. Not having all your trading capital in one investment allows you to spread your risk between other investments with low correlation, meaning if one of your positions move down, another one should be moving up in your favor.

The second is diversification between time-frames. Having multiple positions based on different time frames can provide an overall lower volatility in your portfolio. For example you could be long the daily chart for a swing trade that should last a couple weeks, and you may be short the 60 minute chart because you expect a shot term pullback. Time diversification is overlooked by many traders.

Third is through position sizing. It’s better to have a few smaller positions spread captial over various investments than it is to have one position in only one investment (eggs all in one basket).

And finally the last and one of the most important is the stop loss. They are commonly referred to as money management stops. They are not used to increase your positions performance. Instead they are there to protect you from unnecessary loss if the market moves against your position. Keep in mind when I say protective stop, I dont mean a mental stop (one floating around in your head) I mean a read stop loss order that is live in the market. Risk control should never be an option, it’s a MUST!

In short, risk control will not single handily allow you to beat and profit from the market. But without managing your risk you have no hope of winning in this industry. The key is to stay in the game long enough to start seeing gains and allowing your money to compound over time for above average returns.

Controlling risk is in each trade that is taken with my subscribers at TheGoldAndOilGuy.com ETF Trading Strategies are something I always provide. Consider joining the newsletter today and start trading with confidence.

Also stay tuned for the next part in this series Lack Of Self-Discipline!

Chris Vermeulen
www.TheGoldAndOilGuy.com

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The Four Biggest Mistakes by Stock & Futures Traders – Part II

This part two of a five part series of the four biggest mistakes traders and investors make which costs them time, money and usually self-confidence when trading stocks, ETF’s or futures trading strategies.

The Four Biggest Mistakes

1. Lack Of A Trading Plan – Part I

2. Using To Much Leverage

3. Failure to Control Risk

4. Lack Of Self-Discipline

 

Mistake # 2 – Using Too Much Leverage

With this section talking about leverage I am mainly going to be referring to futures trading because futures provides the most leverage. Anytime I talk about futures trading with someone, more times than not they either say they do not trade those things, or they tune out all together because in their mind its crazy and risky.

While there is no question that futures can be volatile at times, what individuals do not understand is that it’s not the volatility of the market that cause problems. It’s proven that most large cap big name stocks actually have more volatility than the majority of futures contract whether it’s the SP500, wheat, corn, gold, oil etc… The problem is the amount of leverage one used with their money.

 

Understanding Leverage

The difference between trading stocks and futures is the amount of capital required to enter a trade. While this could be a very long and detailed section with examples of leverage, I am going to keep things simple and short cause it’s really not that difficult.

Using an example of a trader which we will say his name is “Dave” who wants to trade the SP500 index with their risk capital here are two examples that show how leverage drastically changed the outcome of a position.

Dave has a $10,000 account, and wants to swing trade the SP500 index.

Option #1: He buys $5000 worth of the SP500 ETF (SPY). And if the SP500 rises in value by 3% Dave would see a $150 gain on his trade. This ETF has no leverage and follows the performance of the stock market.

Option #2: Dave decides to buy 1 ES mini futures contract which is the SP500 Index futures contract. Using the same numbers as the previous option, the SP500 rises in value just 3%. How much money did Dave make on this trade? He made a whopping $2,625 on the same move that the ETF did, how is that possible?

Let me explain, when you buy a non-leveraged ETF like the SPY with $5000, you are literally only trading with a $5000 investment. But with futures, when you buy one ES mini contract which is worth roughly $5000, you are actually controlling roughly $75,000. So think if it as 17.5x leverage on your money.

So that 3% gain in the stock market is based off a $75,000 investment which is how you get $2625 or a 52.5% return on your money.

Futures trading in my opinion is not for beginner or intermediate traders. The only way your money should be involved with futures is if you truly understand how the market move and have strict money management rules, or us a system that trades and managed positions for you. Remember, leverage is a double edge sword that can make you wealthy or broke quickly if not traded appropriately.

 

Why Do Traders Make Mistake #2?

The simple answer is mainly because of “ignorance”. I’m not saying most traders are ignorant, im just saying most individuals are unaware of the mount of leverage involved with futures trading or even the 2x and 3x leveraged ETF’s.

People who are used to putting up $10,000 of capital to buy $10,000 of stock/ETFs often assume they are doing the same with futures. Little do they know, that $10,000 position in futures is actually controlling $170,000 and in some cases up to $330,000 in capital.

Another problem is that most brokers will not tell you when you are over leveraged. Brokers make money on trade commission’s so it’s not too often they tell you to trade less and watch your leverage levels.

 

How to Avoid Mistake #2

7 Steps To Win With LogicA way in which you can try and void trading with too much risk is by having the properly account and position size. The key is to use just enough leverage on your money to generate above average returns while not exposing you to too much risk.

Of course trading with leverage come increased trading emotions. This is one of the reasons why automated futures trading systems have become so popular. Having system (mechanical trading system) can eliminate a vast majority of emotional and psychological issue us as humans struggle with.

 

Using To Much Leverage Trading Conclusion:

In short, if your trades will typically have a drawdown of say 20%, then you must be sure your account has enough money to be able to enter the same size position after lose 20% or your account. If you will not have enough money left to keep trading then either adjust your strategy or deposit more capital.

To get a solid feeling of how leverage works I suggest spending 20 minutes and play with a calculator and play with the potential gains or losses using various leveraged instruments like the 1x, 2x, 3x exchanged traded funds, and also futures contracts like the ES mini which is $12.50 per tick, or $50 per point.

I do provide trade ideas and my position sizes for all the trades I take at my ETF and futures trading newsletter www.GoldAndOilGuy.com

Stay tuned for Part III – Failure to Control Risk

Chris Vermeulen

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The Four Biggest Mistakes in Stock & Futures Trading Strategies

In this series I would like to share with you the four biggest mistakes traders and investors make which costs them time, money and usually self-confidence when trading stocks, ETF’s or futures trading strategies.

The Four Biggest Mistakes

1. Lack Of A Trading Plan

2. Using To Much Leverage

3. Failure to Control Risk

4. Lack Of Self-Discipline

Throughout this multi-part series I will cover the major mistakes, why traders make them and how you can avoid them with your stock, ETF, and futures trading strategies.

While most books about trading are based on success, I want to talk about the other 90% of traders and trading results – the dark side of the business. Why? Because if you can avoid the mistakes then success should naturally happen. Trading As Your Business should not be taken lightly and it’s generally the little things (negatives) that make the biggest differences.

 

Part I – Lack Of A Trading Plan

Recently to took a free online course by Steve Blank. The program was called “How to Build a Startup”. This course was really well done and if you are an entrepreneur then it’s a must do course hands down. I think it took me roughly 10-12 hours (online videos with embedded quizzes). Anyway, Steve teaches you everything you need to know and do before starting any type of business and why so many individuals fail to succeed.

The #1 mistake made by traders is because they have no trading plan to guide them through the financial market place. A surprisingly high level of traders enter the market without a clear strategy on how they will trade in and out of the market. Most traders are so excited to start trading they simply skip the process of creating, building and testing a stock, ETF of futures trading strategy before they actually start trading with real money and why there is a high rate of failure.

If you take great pride in your trading and truly want to succeed over the long run, then I am sure you find yourself as I do, constantly consumed by monitoring your trades and strategies to be sure the process is executed correctly. If this is you, then congratulations, you are rare and likely making some big money.

Why Do Trades Make Mistake #1?

The main reason individuals trade without a plan is because of the allure that making money in the market can be quick and highly profitable. Many people just do not want to “waste” time planning to trade when they can just pull the trigger to buy and sell within minutes of opening a trading account.

This mind set is understandable. We are all guilty of tossing a product manual to the side and just try to build or use a new product without learning how it works, only to realize hours or days later we are reading the manual because we made some mistakes…

Let’s face it, with so many marketing ads hitting our inbox each day, and books talking about how traders are turning $10,000 into $1,000,000 in less than a year most novice traders will get fired up and start trading before they are truly ready.

 

Stock ,ETF and Futures Trading Strategies Brutal Truth You Don’t Want

As with any business or professional to be a success a great deal of hard work is typically involved. First of all it is not easy to build a successful trading plan. And then if you can do that, then you need to follow the plan, which is actually even harder. If you want to be a successful trader then you better be prepared to pay the price in terms of time and money.

 

How to Avoid Mistake #1 – There are only two ways around making this mistake

Avoidance Method 1 – The first is to devote as much time and energy needed to develop a detailed stock, ETF or futures trading strategy that addresses all of the key elements of a successful trading plan and system and still knowing that this will BOT guarantee your success.

The Key Elements That Must Be Mapped Out

– How much money can you afford to lose/trade without affecting your lifestyle?

– What market/s will you trade?

– What trading time frames works best for you?

– Day trade, swing trade, investing, manual order entry, automated trading system?

– What will your criteria’s be for entering a trade?

– What will your criteria’s be for exiting a trade with partial profits?

– What will your criteria’s be for getting stopped out of a trade gone bad?

– What time frame chart will use base the trend of the market on for you trades to follow?

– How will to manage positions by letting your profits run and by cutting losses?

 

Avoidance Method 2 – The second and fasted growing route traders and investors are going is to buy or subscribe to ETF Trading Strategies, or Futures Trading Strategies and fast track the process to hopefully make money trading with the least amount of effort, the lowest amount of downside risk for their capital and being 100% hands free.

 

Part I  – Conclusion:

I hope this short report helps you see the light at the end of the very long tunnel of creating, building and following a trading plan. Without this first step/blueprint you are doomed from day one.

Keep your eyes open for part II where I will talk about trading with leverage, how to avoid it, and how to use it to generate massive gains if used correctly.

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Chris Vermeulen – www.TheGoldAndOilGuy.com