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Keeping Solvent with a Few Futures and Options Trading Rules

Follow this list of trading rules to maximize your chances of being a successful — and long-lasting — futures and options trader:

  • Trust in chaos. Prices follow a nonlinear order. They tend to stay within defined channels or trading ranges but then enter an area of disorder by rising above or falling below that range. You can make big money by figuring out how to spot the transitions from chaos to order and back to chaos.

  • Avoid undercapitalization. If you don’t have enough money, don’t trade, period. According to most pros, you need between $20,000 and $100,000 to open a futures trading account. More important is making sure that your $20,000 to $100,000 is money you can afford to lose.

  • Be patient. Take your time picking and choosing the right times to trade. Trading for the thrill of it or because you’re bored is a recipe for disaster.

  • Trade with the trend. Technical analysis tells you the direction in which the market you’re trading is headed — how it’s trending. When trading futures, the market trend, your time frame, your entry and exit points, and the protection of your capital in between are all that matter.

    When trading with the trend, never lower your sell stops just because you think the market will turn around and that you were too tight in setting them. Likewise, when selling short, never raise your stops if the market starts going against you.

  • Believe in the charts, not the talking heads. The ultimate truth about trading is the price action. Few sources offer a better view of price action than price charts, especially in the fast-moving world of the futures markets.

  • Diversify for protection. In the futures markets, diversification relates to how much cash you have on hand and how you allow seasonal tendencies of the market to affect your trading. Futures diversification boils down to your ability to manage your capital, your time, and your experience.

  • Limit losses. Don’t risk any more than 5 percent of your trading capital on any given position, and limit your losses to 5 percent of the value of any given trade.

  • Trade small. Trading small goes along with limiting your losses. If you have $5,000 equity (which is way too little to think about trading futures), never trade contracts that require a $5,000 margin. Also, if you’re a beginning trader, trade only one or two contracts at a time.

    A perfect, or nearly perfect, contract for small accounts is the Chicago Mercantile Exchange (CME) E-mini Eurodollar contract. Margins for the Eurodollar contract tend to be less than $1,500 per contract, so you’re thus at least closer to following the 5 percent rule.

  • Have low expectations. As a trader, you need to expect to have losses — most good traders are right a third of the time on average and half of the time during periods when they’re hot — and cut those losses short. Adopt the mindset that if you come out even or a few bucks short, it’s a good day. The key is being able to continue to trade because the longer you stay in the game, the greater your chances of making the occasional big trade.

  • Set realistic goals. For example, shoot for a three-to-one reward-to-loss ratio, wherein your goal is to double your money twice over while setting prudent stops and managing your money correctly.

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