per contract. Most of the time you’ll know where your stop-loss needs to be, so you’ll base your entry on that. For example, if you don’t want to risk more than two points, and you place your stop at 1505 in the S&P emini, then you can’t buy it if it’s higher than 1507.
Oftentimes, you’ll use the stop-loss as a map point to determine where you can get in because you know where your stop-loss needs to be. Since you’re not going to risk more than two points, you can’t buy any higher than two points above that stop-loss. If it’s higher than that, you have to wait until the market comes down or leave the trade alone. Earlier, you mentioned that people tend to hold onto their losers but sell their winners. This is typical, since people don’t want to admit they’re wrong. What’s a good way for them to overcome that type of thinking?
It’s easy, really. All you have to do is practice, practice, and practice without using real money. It’s important to un- derstand everything with the simulator. We’ve had students on simulators for as long as a year. We’d love to have the stu- dent off sooner, but if they’re not having success and they can’t get a grip on the mindset, then they continue practicing on the simulators. They’ve got to keep practicing the techniques and recipes, and make sure all their rules are met before entering a trade. It’s really important to use a realistic simulator and keep watch- ing the news at the same time.
It’s similar to a flight simulator in that it tries to recreate a similar environment. A flight simulator recreates a realistic environment for the pilot so he can learn to fly. Similarly, when you are learning to trade, you want the environment to be as close to the real trading environment as possible. You have to get realistic fills, not just those that take place when price hits a certain level. Trading in an unrealistic environment gives people false hopes and they’re not practicing in the right envi- ronment. Only if you practice correctly will you be able to get over holding onto losers and selling the winners.
In addition to practicing under realistic conditions, their reactions to market
conditions have to be as if they’re second-nature, so doesn’t consistency play a role?
It does, and we even take it a step further. We teach the emotional side of trading, and one thing I take pride in is our visu- alization techniques. We encourage our students to spend some time away from the screen, close their eyes, and visualize their trades. We want them to visualize their good trades, their bad trades, and what they’re trying to accomplish. This is similar to what lots of athletes do.
Learning to trade is difficult. We try not to give anybody false hopes or make them think they’re going to make millions of dollars right away. We let everyone know that it’s extremely dif- ficult to be a good trader. If you have a lot of bad habits you’ve picked up from trading for several years and you’re not following rules or you’ve fared poorly, you’ll find it even more difficult to ac- complish what you want.
The only way anyone can learn to trade successfully is to learn the way they did in school. They need to learn the mate- rial, they need to learn the techniques, and they need to be able to practice what they are learning. It takes a while. People need to realize that they need to put their time in. They think it’s a quick and easy way to make money since you don’t have to get a degree to trade. All you need is a trading account and be able to either press the buy or sell but- ton or tell your broker to. And if you’re lucky, you could make money that way. Unfortunately, if you make money the first time you trade, you probably think you know what you’re doing.
I would think continuous learning is necessary because markets never behave in the same way. You never know what you’re going to face at any time. It is not objective like many other professions are.
That’s a good point. Even if the chart formation looks similar to previous ones, Janet Yellen, chairman of the Federal Reserve, could say, “We’re going to raise interest rates tomorrow,” and that would change everything. That’s why stop-losses are so important to place on any open position. If you don’t have a
stop-loss in, to me, it’s suicide. All it takes is one instance when you don’t have a stop-loss in place and the market flushes all the way down, wiping out your entire account. There’s no time machine to go back in time to fix that.
No, you just have to get comfortable taking that loss.
Yes, and here’s what is unfortunate: If someone lost their entire account (which was, say, about $10,000) because they never put a stop-loss in and never exited the trade, then they want that $10,000 back right away. Prior to the loss, they may have only been looking to make $300 or $400 a day. Now all of a sud- den, they need to make $10,000. That’s just not realistic. We have to avoid those types of situations and make sure they never happen in the first place. But when they lose that much, wouldn’t they be tempted to blame the trading system they learned and move on to a different technique taught by someone else? They would lose consistency, since there are so many different ways to trade. And they would end up making similar mistakes, wouldn’t they?
For sure. The wheels come off, and they lose a significant amount of money because they didn’t put a stop in or something like that. They then go to another educator. It’s just too late at that point. They may be better off not going down that road again. After such an emotional turmoil, you want to make that money back, but it’s so difficult to get back on your feet and start trading and be successful.
Thank you for sharing your thoughts, Larry.
F
urtherreadingGopalakrishnan, Jayanthi [2007]. “Larry Levin Has Those Traders’ Secrets,” interview, Technical Analysis of StockS & commoditieS, Volume
26: January.
• www.tradingadvantage.com • www.tradingadvantage.tv • www.tradewithlarry.com
FUTURES FOR YOU
SO MANY CHOICES (PART 2)
Shopping for a commodity brokerage is overwhelming; what should I be looking for? (part 2 of 2)
Last month in part 1 of my response to this question, I discussed the various types of brokerage firms along with the pros and cons of doing business with each format. This month, I’ll focus on various levels of service available to futures traders and briefly consider which makes the most sense for typical traders of differing skill and experience levels, as well as accounting for the cost of errors when considering an appropriate commission rate.
CHOOSINg A bROkERAgE SERvICE lEvEl
• Full-service (broker-assisted)
Technically, “broker-assisted” describes a moderately lesser service than “full- service,” but for simplicity and brevity, I lump them together. Full-service brokers generally offer their clients a substantial amount of hand-holding; this most often involves trade placement and execution, market guidance, trading recommenda- tions, and other hands-on tasks such as margin call management. Most impor- tant, they attempt to steer clients clear of the most common pitfalls in commodity trading.
Full-service brokerage service comes at an additional cost in terms of com- mission, but it might be cheaper than paying costly tuition to the markets in the form of trade placement errors and other avoidable mistakes.
Unlike the days of old, a good full- service broker should be able to accom- modate your orders during market hours via telephone, email, instant message, or maybe even text message, during market
hours. Obviously, brokerage firms must keep records of all client communica- tions, so in some cases, electronic com- munications are preferred due to the ease of compliance monitoring.
• Self-directed online
Traders with enough experience to have garnered the basic knowledge necessary to navigate a trading platform — such as commodity symbols, available trading months, and calculating risk — might opt to save money on commission and place orders through an online platform. However, before doing so they must be capable of emotionally coping with the urge to overreact, or worse, overtrade.
I’ve seen too many beginning traders rush into online trading. Their goal is to
save money, but the goal of trading is to
make money, not to save it. There are
unlimited numbers of examples in which traders choosing this service type for eco- nomic reasons end up losing thousands of dollars in the markets making rookie mistakes. For example, I’ve witnessed traders trade the domestic sugar futures rather than the more liquid world futures contract. This simple mistake can easily cost you several hundred dollars on a single contract because of the lack of liquidity. To put this into perspective, the day I wrote this article, the world sugar fu- tures contract for March had traded nearly 37,000 contracts but the domestic sugar
contract for the same expiration month traded only five contracts. Quite simply, if you make the mistake of getting into domestic sugar, you might have a hard time getting out at a reasonable price.
Other common mistakes are trading the wrong year or month, buying when the intent was to sell or vice versa, not being aware of open and close times of each market, and not fully understanding the difference between stop and limit orders. Further, it isn’t uncommon for beginning traders to sell a contract that is locked limit up. In such a scenario, the exchange’s daily price limit has been reached, leaving an environment in which you are able to sell but not buy. The justification beginning traders often use for selling into a limit move is that prices cannot go against them because of the price limit. They see it as a risk-free trade; however, nothing could be further from the truth. Although price cannot go up in the current session, you may not be able to exit the position until the next session, at which time prices might be considerably higher, maybe even limit- up to trap them into the position with large losses.
Each of these mistakes is costly but can be easily avoided with proper experience. If you are not ready to trade online, you should be willing to pay a little extra for the expertise of a full-service broker and work your way toward being an online trader. Simply put, don’t trip on dollars while chasing pennies.
• Discount online
Traders opting for this level of service should be experienced and highly capable of operating with little help from their
Carley Garner
INSIDE THE FUTURES WORlD
Want to find out how the futures markets really work? Carley Garner is the senior strategist for DeCarley Trading, a division of Zaner Group, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription, visit www.DeCarleyTrading.com. Her books — Currency Trading In The Forex
And Futures Markets; A Trader’s First Book On Commodities; and Commodity Options — were published by FT Press. To submit a question, post your question
at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.