The futures market is faster moving and more hectic than traditional equity markets. Consequently, it can be easy to get caught up in the moment. When traders get carried away, they can divert from their tried and tested trading strategy. These are the moments when traders are at the greatest risk; the adrenaline is pumping, and the promise of potential profits is all too tempting.
While it is essential to know when to trade, it is equally important to know when to stop trading and call it a day.
1.) Why is knowing when to stop trading important?
In some areas of life, when you throw enough darts at the board, you will eventually hit the target. That’s not at all the case in the world of trading. When it comes to the futures markets, or indeed any derivatives markets, sometimes less is more.
“Quality over quantity”
You should never feel obligated to trade. Being anxious when you are out of the market and more relaxed when you have an open position is a dangerous attitude to have. All of your trading decisions should be based on current market trends your expectations for the future, wrapped up within your risk-management strategy. Your head must make your investment decisions rather than your heart!
1.1) Putting it into perspective
If we look at a long-distance runner, training, hitting the road, literally putting in hundreds of miles a week to reach peak performance. Under-training may leave them out of shape by the time competitive racing begins. Conversely, as we have seen with many athletes, overtraining leaves them susceptible to injuries and time off the track. They need to find that sweet spot, the optimal amount of training, so they can reach peak fitness and not overdo it.
This is how traders should view their trading behavior patterns. Passing on an opportunity to trade might see them miss out on potentially lucrative opportunities. Over-trading will almost certainly reduce the quality of trades, leaving them more open to risky positions and losses. We can sum it up in a single sentence that perfectly describes trading:
“It’s a marathon, not a sprint.”
2.) What are the reasons to stop trading?
There are many reasons to stop trading for the day. Some of them will come down to market hours, market conditions, as well as your mindset. The idea that you can simply jump out of bed, log on and start trading futures right off the bath is a myth. You need to clear your head and get over the morning grogginess; maybe take a walk, have a coffee, and some breakfast. The reason to take these steps is apparent: you want to trade when your mind, but more importantly, your focus, is at its best. You should be taking the same sort of precautions during your trading to make sure you catch yourself when you start to slip up.
2.1) Trading hours
Whether you are a day trader or willing to take a longer-term approach, you must know the market hours for the investments you trade. The most significant risk for most traders is leaving an open position overnight. It can expose them to all sorts of unexpected events. Let’s look at the US futures market, for example. Trading is most active around 8:30 AM to 3 PM (CST). While it is possible to trade futures nearly 24 hours a day, five days a week, liquidity outside of traditional market hours will be relatively low. Consequently, if you are a futures day trader, you have to close all your positions before the end of the “normal” trading day.
If you are interested in taking part in our Trader Career Path, your positions will need to be flat between 3:10 PM to 5 PM (CST). This ensures that while you are trading on a virtual platform, you experience the same challenges and timescales as a live market trader. As a day trader, you need to monitor your positions in real-time, and while trading 24/7 may sound attractive, it’s not feasible. Even if there were potential positions to trade outside of regular market hours, we all need a solid sleep schedule.
2.2) The wrong mindset
Where do we start on the subject of trading with the wrong mindset? Like it or not, we have all done it. The temptation to continue trading against your better judgment is always present. However, knowing the most dangerous impulses will help you recognize and avoid them. Some of the most common mistakes in trading psychology include:
In all honesty, if you look back to your previous trades, are there any that you regret in hindsight? Yes, we are talking about the dreaded boredom trade. We have all been there, cash on the hip, money burning a hole in our pockets, and looking for the next significant position.
If you find yourself actively seeking trades that don’t necessarily fit in with your chosen trading strategy, you need to step back. Trading for the sake of trading is a recipe for disaster. Whether buying futures, trading equities, or commodities, the quality of your trading, not the quantity, will determine whether you succeed or fail. In addition, day trading futures can be tiring, both mentally and physically. So, if the markets are relatively quiet, why not take some time off?
Gordon Gekko famously said that “greed is good,” epitomizing the investment world in the 1980s. However, while greed is a powerful driving force, it can ruin the best of traders!
Before taking any position, you should have an entry point and an exit point in your mind. There needs to be a degree of focus and also a degree of flexibility. Markets are constantly moving, and therefore your target price should also be fluid. When billionaire investor Nathan Rothschild was asked how he made his fortune, he replied:
“I never invest at the bottom, and I always sell too soon.”
Every investor wants to buy at the bottom and sell at the top, cashing out the maximum profit. Unfortunately, this is not feasible, and if it does occur, it would likely be more by luck than judgment. While all traders are looking to maximize their profits, greed can easily take over and ruin once successful trading positions. Once a positive trend turns, profit takers and shorters will be all over this. For the sake of a few bucks, you can very quickly see a profit disappear, leaving you kicking yourself for being too greedy. If greed takes over, stop trading, take a step back and reset yourself.
2.2.3) Chasing trades
To be a successful trader, you need to have a degree of self-confidence, an ego, if you will, and a strong belief in your trading strategy. During the trading day, you will often spot a potential trade, the chance to make a good turn, and bank some profit. However, whether you have been distracted, are not sure of the trade, or need to release funds to reinvest, sometimes you can miss the best price. This brings us to the problem of chasing trades.
Our frustrations and sometimes anger will build as the price goes further and further against us. Then bang, we let our heart rule our head and open a position we know in our heart of hearts is wrong. We have missed the best of the trade; the risk-reward ratio is stacked against us, then suddenly, the price moves the wrong way. What do we do now?
We have all been there, chasing a trade that looked good at $10,000 but not quite so attractive at $15,000. So if you feel tempted to pursue a trade you know is wrong, take a step back. Stop trading and refocus.
2.2.4) Revenge trading
Akin to a poker player on a losing streak, determined to end the night on a positive note, don’t go all-in on a revenge trade. Whether you bought too early, sold too soon, or missed an earlier trade, looking at each investment opportunity in isolation is essential. That last trade is gone that missed opportunity history. You need to reset, refocus and look for the next trade.
By definition, if you are sucked into revenge trading, you will be upping the ante, the risk/reward ratio, and leaving yourself open to potentially significant losses. The best and the most successful traders are those who don’t get emotional, don’t revenge trade, forget their failures, but also learn from them. If your mindset is focused on revenge, making up for lost opportunities, this is not a time you should be trading. Stop now!
3.) Recognizing when it is time to take a step back
While we have listed some of the more common reasons why you should stop trading, this list is by no means exclusive. We all have different strengths and weaknesses; other emotions drive us and different outside influences. However, one common trait among many of the scenarios listed above is emotion.
If at any time you feel like your emotions are driving your decisions, your heart is ruling your head; it is time to sit back, relax and stop trading. It can be very easy to get caught up in the moment, revenge trading, chasing missed prices, and trying to extract the last cent out of every position. After all, we are only human, but we need to have a dividing line between focused trading and outside influences.
The best traders in the world can spot a potentially lucrative opportunity in a split second. However, they also know when to call it a day, when emotions are high and fundamental trading goes out of the window. As a result, their “risky” trade percentage is less than the average trader, reducing potential losses while maximizing potential profits. This is a critical mindset, but you will need to experience the lows before enjoying the highs.
4.) Following your trading plan
The key to successful trading is running your winners and cutting your losers. While this sounds relatively simple in theory, in practice, it needs discipline, focus, and a trading plan to fall back on. All traders, especially futures traders, work on stringent stop-loss limits. Closing a position when it hits a particular stop-loss limit should be second nature, something which is done without additional thought. This ensures that the downside to your trades is limited, but the potential upside is more flexible.
There are many different trading plans/strategies to consider. You must choose one that reflects your strengths and trading philosophy. Unless you fully buy into the trading plan, it simply won’t work.
5.) Unsuitable market conditions
Since the emergence of Covid, we have seen massive swings in both equity and futures markets. While these are often seen as a “traders dream,” on occasion, market conditions may not suit your particular skills or trading strategy. If the risk-reward ratio is too high, there is too much uncertainty. In such cases, simply take a step back, take a break, and don’t trade. What’s the worst that can happen?
You retain your funds on deposit and live to fight another day. Is that really so bad?
On a side note, those taking up the Trader Career Path should be aware that investment returns are not everything in the final evaluation. If it turns out that you took undue risks to bank a significant return, this will not reflect well. The end goal is a fully-funded live trading account. However, our trading partners look for traders who appreciate the risk/reward ratio. They don’t abuse it. They want traders who will be here today and here tomorrow.
6.) Final thoughts
The biggest challenge to any trader is their own emotions. Whether this is fear, greed, revenge trading, or letting your heart rule your head, you need to take a step back once these emotions emerge. It is very easy to “get caught up in the moment,” lose sight of your focus, your trading strategy, and your appreciation of the risk/reward ratio. Discipline is the name of the game, something epitomized by successful historical and current-day traders. Have you got what it takes?