Use stops. But you must be aware of their limitations. You must realize that your order will not necessarily be filled precisely where you have placed your stop. You also must

realize that occasionally mistakes can be made.If you trade stocks, you know that it’s possible for orders to be lost, or taken or placed incorrectly. The point is that just because you place a stop, doesn’t mean you can walk away from a trade and assume everything will be perfect. You must take an active role in your trading and your open positions.

Check your stops, daily if necessary, to make sure they are still in place. Be prepared to move them if you have profits. You must protect those profits as best you can.

Every book you read about trading stresses the importance of using stops-actual stops not just stops ‘in your head.’ I did not use stops for several years as a broker, and now I know why. First, I did not want it to appear that I was just trying to generate more commissions by using stops.Second, early in my career, I was not smart enough to just trade trending markets. I traded choppy, nontrending markets trying to pick tops and bottoms. If I had used stops, I would have been stopped out continually. In retrospect, it would have better for my clients if I had traded only trending markets and used stops.

There would not have been some of those bloody massacres I perpetrated by my lack of respect for leverage and the markets. Third, and the reason I am least proud of, is that I did not use stops because I wanted my clients to need me. I did not want it to appear that a trade was on automatic pilot by entering the stop right after we put on the trade.” All a novice trader should have to know about stops is that the most successful and sophisticated Commodity Trading Advisors (CTAs) have stops as an integral part of their trading programs. They set predetermined risks and stick to them. They do this unemotionally, unlike many novice and even experienced traders.

Successful trading is all about limiting risk and maximizing reward. If you insist on trading without stops, you remove one of the two major elements for success. This sets you up to eventually fail.Not using stops is like walking a high wire without using a net. You might get your adrenaline fix, but one bad slip can kill you.

Over the years, I have received literally thousands of suggestions that anyone trading futures should use stops. The preceding comments are representative of these suggestions. I hope I have made the point. If you insist on not using stops, the vast majority of brokers and traders we interviewed feel you should not be trading.Here are the other rules and trading strategies for beginners that occurred most often in our surveys: Don’t discuss or justify your trading decisions with your family, friends or acquaintances. Doing so ‘marries’ you to the position and it becomes all but impossible to maintain your trading discipline.Only commit 25% of your equity to the markets. Keep 75% in reserve for margin calls and a psychological cushion.

NOTE: The 25% figure in this example ranged from 20% to 40% in the survey responses.

Design your exit strategy upfront, before the trade is even initiated. When you put on a trade, enter both a Good ’til Cancelled Money Management Protective Stop and a Good ’til Cancelled Profit Objective Limit Order for that trade. As soon as one of those two exit orders are filled, cancel the other one.

Incidentally, if you form the habit of consistently entering a ’stop loss’ order but not a ‘profit objective’ limit order, you are forming sloppy habits, which are sure to eventually produce sloppy results. Furthermore, entering these ‘money management’ orders ahead of time lets you make your trading decisions during quiet times of contemplation. This prevents you from becoming victimized by market action and making emotional decisions during the heat of battle.My advice for beginners? The only thing I can tell them is the major mistake I made when I started trading long time years ago. And I still make it, although not as often. When I started, I did not cut my losses short.

I figured I was smart and that most of my trades should be winning trades. And if I waited long enough, my losers would come back and I would have a winner. I would ‘bargain’ with the markets and say to myself, ‘I just want to break even on this loser. I promise I will liquidate when the market comes back to where I bought it.’ The market doesn’t know where you got in or care. And it may never come back during the life of that contract. Often, it doesn’t.

Dear beginning trader, I have a message for you. I have watched 100s of brokers and traders in this office for over 20 years. Most of their trades are losing trades-even the most successful brokers. This is how you must think about losses: Anticipate them. Expect them. Plan for them. Welcome them. Embrace them. Grab them. Your first loss is your least loss. Most important, don’t take losses personally. They are an integral part of successful trading.

Sometimes brokers don’t want to liquidate a losing position because they’re worried their client will think they’re just trying to make a commission. That is a dumb reason. A market going against a trader can cost a lot more than a commission. Beginners must realize that getting out of positions is even more important than getting into positions. I was a trader on the floor of a major commodity exchange for 23 years. Here’s my advice for beginning and experienced traders as well. The most important rules for a speculator to be successful are discipline and trading with the trend. A speculator, no matter how knowledgeable, capitalized, or confident, will never be consistently successful without discipline. There is no question that peculating is a stressful and emotional activity. The equity, futures, and options markets are unpredictable in nature and thus cause a natural amount of inherent anxiety among the participants.

The equalizer to this anxiety is discipline. Speculators cannot control the markets, but they can control themselves. The speculator’s ultimate success or failure depends on his or her ability to: quickly identify a losing trade, admit the mistake, and have the discipline to get out of the trade with a minimal loss rather than being stubborn and compounding a loser into an even bigger loss. The same discipline comes into play for profitable trades. A speculator must never turn a winner into a loser. Although I hate clichés, it is true that you can never go broke by taking a profit, no matter how small. Add to a winning position if the fundamentals and technical information haven’t changed. I think most speculators lose money because they don’t create trading rules for themselves and they lack the courage to accept losses as part of the game. Most speculators lack the discipline to stick with a trading philosophy during the bad times as well as the good. As a result, they become inconsistent in their trading methods and, accordingly, so do their results.

There is strong misconception on the part of the general public that speculating in the financial equities’ and commodities’ markets is akin to gambling. They do share some of the same characteristics, but speculating is a business and should be treated as such. A Fortune 500 company coming off a bad quarter after four good quarters will not suddenly overhaul its business plan, the same business plan that produced those four good quarters. A speculator should be guided by the same philosophy. Find out what works for you and stick with it. Don’t change you trading rules and lose your discipline because of a few bad trading days. Your first trading rules should be to protect and preserve your trading capital. The name of the game is to survive. The opportunities to make a lot of money in the markets do come along. But you must be around to take advantage of them.

NOTE: This “preservation of capital rule” came from literally hundreds of traders and brokers alike. Some additional comments along these lines were: Only risk money if the trend has already started. Don’t try and pick tops and bottoms. Take your bite out of the middle. Standing aside is a position. Don’t let your need for action force you into a trade because you’re bored.

Make sure the risk/reward ratio is at least four to one. If you don’t know how to figure out a risk/reward ratio, stay away from trading until you do. I have been on the sidelines for as long as six months,

and I’ve been trading for over 20 years. I worked too hard to make money in the markets and I’m not going to risk a D-Mark unless I see an outstanding opportunity where the odds are in my favor, not the market’s favor. (From a CTA from Germany, founder of one of the most successful funds in the futures industry.)

I’ve been a broker for almost ten years. The only brokers and traders I’ve seen make money have these three common traits:

1.They seldom trade.

2.When they do trade, they have a predetermined entry level and a conservative predetermined risk. Their upside objective is seldom, if ever, capped.

3.They only risk a very small part of their trading capital on any given trade.

I follow W.D. Gann’s advice and don’t trade very often. Don’t follow anyone else’s advice unless you know that they know more than you. Be aware that you may be particularly vulnerable to someone else’s advice or hot tip if you have not had a good trade in a while. You may be desperate and looking for anything to relieve the pain of losing. It’s easy to talk yourself into or out of something when you’ve lost your confidence. Loss of confidence often comes from losing. Have a game plan for exiting losers. Make this plan beforehand because you almost never are thinking clearly about a position when it’s a losing position.

NOTE: The majority of submissions for the most recent surveys focused on limiting losses and did not talk as much about riding winners.

• (1)  ‘The trend is your friend’ is the most important rule you can follow. Always trade with the trend. Only add to a position if you have profits in that position and if the long-term trend lines confirm the trade.
• (2)  Don’t overtrade. Most beginners trade too much and/or start trading with too little money in the account. I suggest you have enough money to be wrong 15 to 20 times and still have enough money to continue trading.
• (3)  There is never an emergency to get in any specific trade. In futures, if you miss a market, simply wait a little while. Another market will look just as good in a month or two or three. Relax; only trade the very best opportunities. Don’t talk yourself into a trade just because you want to be in the markets. The markets will always be there. They’ll wait for you. Trade them on your time, not theirs.

Most new traders don’t respect the leverage of futures trading. If they open a $10,000 account and initial margin is, say, $1,500, they want to buy six contracts. A small move against them could trigger a margin call and right away emotional decisions come into play. I suggest that a new trader not use more than 20% of his or her equity for margin.

NOTE: as mentioned earlier, many experienced brokers made this suggestion. The range was 20% to 40%. The average was about 25%.

Patience is a common attribute of many experienced, successful traders. Beginners are almost never patient. They want to ‘do something.’ Often they are proactive in their business and personal lives and want to trade the same way. In futures, riches often come to those who have the discipline to wait. I don’t mean wait and watch a losing position cost you half your trading capital. No, when it comes to cutting losses short, you must be proactive. However, you must be patient when standing on the sidelines waiting for a solid trading opportunity. You must be patient when you have a winner, patient enough to let your profits run if market conditions warrant.You must be patient and not add to a winning position prematurely. You must be patient with your broker, the floor, the trading conditions, the economy, the weather, the technical indicators, the fundamentals, yourself. Trading futures is not for control junkies. You can’t control the markets. Many otherwise successful usiness people have lost a lot of money trying. Ride the train (the markets) in the direction it is going. If you can keep from attempting to impose your will and maintain a cool head right from the start, you’ll be way ahead of most novice traders.Be careful not to let a news item disrupt a sound trading plan. For example, I have seen many a new trader initiate a position that shows a profit almost right from the beginning. The trading plan called for certain profit objectives based on reasonable planning before the trade was made. Then some news that was bearish for the position made the new trader nervous. The trade was exited prematurely, counter to the trading plan. The most substantial part of the move was missed. You must have the discipline to not let your emotions affect your trading decisions. Remember, don’t overreact to a news item or a market ‘hiccup.’

The closing comments in this chapter come from several books on this subject. The rules quoted here from these authors reiterate and add to the comments I’ve received from brokers and traders.

1.  Be mentally and physically ready to trade. Every trading decision must come from an untroubled mind, free of pressure. If you’re concerned about your health, your family, your job, your finances, or any other major distraction, you’re not prepared to take advantage of the markets. Wait until these problems are less significant so you can give your full attention and concentration to the task of trading.
2. Know your stress limit. Stress can be caused by having to make trading decisions. Stress can be caused by unexpected margin calls. Never risk so much on a trade that it causes you to lose sleep. If your trading is causing you to lose sleep, as Jessie Livermore said in his famous book, Reminiscences of a Stock Operator, ‘liquidate down to your sleeping level.’
3. Don’t blame others for your mistakes. On the surface, it’s always easier to blame your broker, the floor, bad information, poor communications, and any number of scapegoats. You are responsible for your actions. Blaming someone or something else for your mistakes keeps you from discovering the real reasons why your trading is going badly.
4. Don’t trade on hot tips. They are as common as dirt and worth about as much. Experienced brokers and traders will tell you they hear them almost daily. It’s good to seek information from market professionals and sources you believe to be reliable. But don’t let those with so-called inside information persuade you to deviate from your trading plan.
5. Don’t talk about your trading. If you do, you are simply giving yourself additional reasons to stay with, avoid, or get back into a trade. When you talk about a trade, you are ‘investing’ yourself in that trade. By repeating your reasons for your position, you are continuing to sell yourself on that trade. It then becomes more difficult for you to be objective about that trade.
6. Most traders, not just new traders, make decisions based on hunches, emotions, and feelings. Thinkers avoid this kind of trading. How do you avoid ‘just reacting to things’? You need a method or trading plan that can be measured. You must be willing to work and develop that kind of a trading plan. You then must commit your plan to writing. This requirement will eliminate most traders… and, I believe, is a major reason why most futures traders lose money.
7. “To be a good trader, you must be intellectually honest, in fact brutally honest with yourself. If you truly understand why you lose and why you win, you will be well on your way to trading successfully.
8. Examine your positions frequently. Keep asking yourself, ‘Is this trade still okay?’ Make sure all your trading decisions are informed decisions, not emotional decisions or uneducated guesses.
9. Good trading means good money management. You must always know how much you are willing to risk on an adverse price movement. Many traders limit this amount to no more than three percent of their capital. NOTE: Throughout this material you will see that different brokers and traders have different percentages of their capital they are willing to risk on any given trade. The range is from one percent to five percent.
10. Never think you are smarter than the market. Not placing stops will come back and take a big bite out of you. And if you don’t use stops, you deserve to have a big bite taken out of you. Hopefully, it will hurt enough to keep you from doing it again. This is experience speaking. I can show you my scars