by Brian Hoops –
If you ask a room full of active and inactive (those who have lost all of their money) commodity traders which skill is the most important in becoming a successful trader, the answers would represent, to a great degree, the weaknesses of those present.
I would guess that the most common response would have to do with picking the right trades at the right time. If it was so easy as to do nothing but pick only winning trades, what else is there to worry about? In reality, no matter how brilliant you are, if you are going to trade commodity futures, you are going to have losing trades.
Another common answer might relate knowing when to liquidate profitable trades. This has definite merit. I have watched a good number of traders turn sizable profits into sizable losses simply because they were perplexed as to when to take profits.
What would be the third area addressed? I wonder if anyone would stand up and ask about taking a loss? I doubt it, because taking a loss is considered a negative. Who wants to talk about losing money when we all want to talk about success?
It is my strongest contention that the inability of commodity traders to accept a loss is one of the biggest obstacles — if not the biggest — to becoming a profitable commodity futures trader. I believe that possessing the mental toughness to accept a loss, and the ability to know when a loss should be taken, are the foundation of being a profitable commodity trader. Let us understand each other right now. If you trade commodities some of your trades, if not a majority, will be losers.
If you are going to be a trader of commodity futures, you are going to have trades that lose money. The best commodity traders in the world all have experienced losing trades in the past, and they will suffer losing trades in the future.
Here is an example of a true story of one of my clients. He bought a contract of corn just prior to the release of a government report. The report was a bearish report, but the market did not react immediately to the government numbers. He had an opportunity to get out of the trade with only a quarter cent loss ($12.50), but he refused. He wanted to break even and he was not going to budge with a loss, not even a loss of just $12.50. In the end, he liquidated the trade and lost over $2,000 — all in an effort to save $12.50 and, therefore, not having to admit he was wrong.
If you are going to trade commodities, the chances of having losing trades are pretty high. Therefore, if you are going to be successful, I contend you must know how to take a loss. It can be $12.50s now or $2,000 later.
When you do take a loss, don’t look back. Over the years I have witnessed many traders finally get out of a position, only to constantly look at their old position to see how they would have done if they would have stayed with the trade only a little longer. This can mentally weigh on a trader and eventually destroy him. Once you have exited a position, learn from the trade and then move on to the next opportunity, constantly looking ahead.
If one is to become a trader with a decent chance of success, it is my belief that the trader has to understand he cannot plan for every contingency, every event or every market movement. If a trader is going to use stop or stop-loss orders, the trader needs to understand there will be times that the market will hit his stop and then turn around and go back the other way, while others times he will be glad he’s out of the market completely.
Taking a loss is an essential rule to good money management. There are a number of old sayings I believe give a hint to the true nature of money management. One is simply, “If you are wrong, live to trade another day.” One of the first rules I learned as a rookie in the commodity business was, “The first loss is always the cheapest loss.”
I find it interesting that each of these deals with limiting losses. Is that not a good understanding of money management? My personal definition of successful money management is to limit losses to acceptable levels (while providing the trader with an adequate opportunity to realize a profit from the trade.
In summary, don’t be afraid to admit your position is wrong and take a loss. It will free you mentally to find the next profitable trade, and you will be able to limit your losses and keep your trading capital together.
Brian Hoops is president and senior market analyst of Midwest Market Solutions, Inc., a full-service commodity brokerage and marketing advisory service. Daily market commentary and trade recommendations are available on the Internet at
www.midwestmarketsolutions.com or subscribe by e-mail at firstname.lastname@example.org, call toll free at (866) 203-9655, or write to Midwest Market Solutions, 1028 Broadway Ave., Yankton, SD 57078.
Source: Midwest Messenger