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Ignoring the Psychology of Futures Trading Could Spell Disaster

When a futures trading position starts to move against your original price action premise, it can be tough to resist the urge to exit the position for the flight to safety. A number of emotions are all too common to traders including fear, greed, anger and elation.

Trading based on your emotional reactions to unexpected, unfavorable market conditions could potentially increase the possibility of spoiling a sound trade idea. However, ignoring these emotional reactions altogether could add to the possibility of abandoning your trading strategy. Adding safeguards to your trading strategy that focus on avoiding the urge to exit or liquidate a position could help you maintain composure while reducing the potential for an ‘early exit’.

Examples and Potential Consequences of Emotional Trading

Frequently Entering and Exiting a Position

  • Increased commissions for each ‘round turn’ or entry/exit
  • Exhaust account funds due to exiting a trade at a loss and then re-entering the same position

Exiting a Trade Before Trailing Stop Fills

  • Leaving potential gains ‘on the table’

The chart below of the S&P 500 Futures Contract (ES) is a good example of market conditions that could lead to fear driving you to deviate from your futures trading strategy.

How Can I Plan for Emotion When Building My Trading Strategy?

When planning your futures trading strategy, you may want to add safeguards to accommodate any unintended emotional trade related reactions. Some of these safeguards found available through your online trading platform could include a Trailing Stop, which exits your position if a predetermined change in price occurs relative to current price levels. Below is an example.

  • The amount of your trailing stop is 25 points on the S&P 500 Futures Contract (ES)
  • The 25 points ‘follows’ the current price of the futures contract
  • Exits the position if the current price of the futures contract goes against the trailing stop by more than 25 Points
  • It’s important to note that stop orders are not guaranteed to protect a position. The market may move too quickly for a stop order to execute or fill. As always, please remain aware that there is risk associated with trading futures online.

The chart below of the S&P 500 Futures Contract (ES) is a good example of using a trailing stop:

An additional safeguard could include a stop based on Moving Average Technical Indicators, which exits your position if the financial instruments price action preaches its 50-day moving average. The chart below of the S&P 500 Futures Contract (ES) is a good example of a bearish trend both beginning and ending based on breaching the 50-Day Moving Average:

Please remember, past performance is not indicative of future results and you should always trade within your risk tolerance levels.

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