What Is the Key to Futures Trading

Success?
Interviews by
Courtney Smith

Copyright CTCR, Inc. 1997 and 2005

All rights reserved
CTCR, Inc.
Box 7603
New York, NY 10150-7603
www.ctcr.investors.net
[email protected]

We beat around the bush so much

when it comes to futures trading. We
talk about entry points and stochastics
and the pig crop as if these were the
keys to successful trading. But, in the
final analysis, these are mere blips on the
radar screen.
Trading futures is not about these
things. If it were, then professors, with
their vast amount of knowledge, would
run the world. No, instead, trading
success comes from within.
Most people come to commodity
trading with the idea that if they find the
Holy Grail, they will make a ton of
money. Yet books have been written for
decades showing profitable techniques
and these books have sold hundreds of
thousands of copies. Where are all the
rich futures traders?
So if the problem isn't a lack of
knowledge, what is it? We've collected
19 experts on futures trading and asked
them to tell us what the key to futures
trading success is. I think that you will
find their answers to be very useful.
Some of their answers will be
controversial but most may even appear
to be Mom and apple pie. Don't skim
read this report just because some of the
ideas may seem ho-hum. Many ideas in
this article need to be drummed into our
heads over and over to learn them. Don't
skim read this report unless you are
already making a ton of money already.
I will be back at the end of the
article to wrap it up.
John Abrahamson
Scale Trader
I think the single answer is to

match your emotional style with your

trading method. An easy test for that is
your comfort level when trades go
against you or when the market goes
against your expectations. You probably
have a good match if you can still retain
some level of comfort.
We know most trading errors
have to do with the emotional
indiscretions, shall we say. We know
that it is an extremely important thing to
do and some people who haven't
examined their own emotional style
probably have to experiment to find out
their comfort level: whether to be a
position trader or short-term trader or
daytrading so they can sleep at night.
The ultimate test is your comfort level
when things go wrong. If you have
confidence enough in the system that
will compensate for those necessary
errors then you're probably in a good
place. Following a reasonable system
consistently seems to be the key for
most people who are successful trading.
Colin Alexander
Five-Star Futures Newsletter
To identify the markets where
the real action is. One of the things you
can look at is when the market is starting
to make limit moves or large expansion
into daily mange or gaps. Markets with
these characteristics are the markets that
I want to be trading.
Jake Bernstein
MBH Weekly Letter
What, do you want me to write a
book?

I think ultimately the key to

success is to follow your system,
whatever it is.
Wait a minute. The key is
effective risk management; I take it all
back. No matter what your system.
If you have a system and it tells
you to take a loss, you take a loss,
assuming you think the system is valid.
That will effectively manage your risk
for you. If you have no system, that's
fine. Lots of people trade without a
system. You've still got to find a way to
keep your losers smaller than your
winners, on average.
Here are some risk management
guidelines:
You don't want your average loss
to be above a certain percentage
of your average profit.
You shouldn't commit over a
certain amount of money to the
market.
You should trade a diversified
portfolio of uncorrelated
commodities.
You shouldn't be an options
buyer.
I try to risk less than 10% of my
account size but that's an illusion
sometimes. If you've got a $50,000
count you don't even want to risk $5,000
on a position. My rule of thumb lately
has been to risk $2500 on the more
volatile markets, certainly on the S&P
500, and about $1500 on the others. I
don't have a hard and fast formula for
that.
I try to look at the volatility in
each market. I determine the average
daily trading range and I give the market
about twice the average daily trading
range as my leeway. So, for example, if

the average daily trading range in

soybeans is $.15; I tried to give the
market about $.30 in the way on that
stop. That's about the only thing that
makes sense for me.
For diversification, you need
about 15 markets. Markowitz did a
pretty good study on and proposed, I
think, about 15 markets as being the
best.
Craig Corcoran
Craig Corcoran Futures Hotline
We suspect that the key to
trading success is the acknowledgment or
the knowing of the long-term trend. If
it's a bull market trend, and they are
trying to, on balance, buy the dips or
oversold conditions and to be in the
favor of the trend that is dominant
which, in this case, is an uptrend. In the
case of a bear market, we are looking to
sell into overbought periods or corrective
rallies, so we can be in line with the
dominant trend which would be down.
For us, the biggest point we tried to
make to our clientele is to try to figure
out the long-term trend of the market,
where possible, and to trade in
conjunction with that trend.
To determine the trend, we use
fundamental valuations, subjective items,
such as Elliott wave theory, and
intermarket relations that give us hints as
to whether the markets will be trending
in a bull or bear market fashion. One of
the most recent examples in 1996 is that
rising commodity prices often tend to
suggest interest rates and falling bond
prices. In general, we've tried to trade in
conjunction with the theme that rising
commodity prices would generate

commodity inspired inflationary

pressures and, as a result, bond market
indices should fall and it is best to be, on
balance, short the bond market.
Bob Hafer
Commodity Research Bureau
The one key to long-term success
is to only trade on a long-term basis and
not get caught up in the fascinating world
of daytrading or very short-term trading.
An investor can increase his chances of
success by trying to trade commodities
more like stocks and to treat them as
long-term investments. In order to do
that, you'll need to identify a medium to
long-term system which has proven to
work over time. That system may be as
simple as a 200 day moving average or
more complex, doesn't make any
difference. It just has to be something
that has been proven to work over time.
An excellent example would be our
Electronic Futures Trading Analyzer
(EFTA) program which you followed in
CTCR. It's a medium to long-term
system that has a long-standing and
proven track record of success.
Greg Meadors
Market Systems
The most important thing to
learn is proper money management. You
need to make sure you have sufficient
capital to start with. If you're
undercapitalized, like any other business,
the odds are much higher you'll fail. If
you are trading the S&P futures, for
example, it would be best to have at least
$50,000 in capital. As a rule of thumb,
you should have at least five times the

margin requirement for your portfolio.

Never put at risk more than 4% on any
one trade.
The name of the game is to stay
in the game. That's the primary concern
of many futures traders. If you're
considering doing it as a living than the
more capital you have the greater the
odds are you'll be able to be successful.
However, if you want to make
$50,000 a year, then you should have at
least $250,000 worth of capital to work
with assuming you going to generate
20% return per year.
The name of the game is to stay in
the game.
The key is that if you're
undercapitalized and you're trying to
trade for a living than of course you're
dealing with various types of
psychological factors that can be
harmful. If you're not adequately
capitalized than you might overtrade or
try to make too much money into short
of a timeframe. If you have limited
capital than the key is to survive and
protect capital. That's the number one
thing.
The next is obtaining the
knowledge of the markets that you're
involved in. Contrary to what most
people believe, I believe you should
focus on just one or two markets and
master those rather than being a jack of
all trades and trading a diversified
portfolio of commodities.
CTCR: But surely you could use
technicals across all markets?
Perhaps. I think that each market
has its own particular character and their
certain technical methods that will work

with one market better than another.

Also, each market goes through periods
of time where the character of that
market also changes. I'm not too excited
about the idea of standard mechanical
trading systems or models applied to
multiple markets. While there are some
who have some measure of success over
a short period of time, I think over the
long run, most of them fail.
I found, for myself, that it's more
important to know a particular market
like the back of my hand and know all its
nuances. Each market has its own
particular reactions to fundamental news
and announcements that come out, so,
when you apply a standard technical
model, it doesn't take into account the
reaction of the market to fundamental
announcements that are known in
advance. It's just reacting to the
technicals rather than considering any of
the fundamentals.
For an individual futures trader,
one who wants to attain maximum
returns, I think the key is knowing a
particular market and being able to be
flexible in their ability to take advantage
of various opportunities that occur in
that particular market. In the case of the
stock market, there are periods of time
and certain kinds of patterns that occur
that provide extremely high probability
trades. Those are opportunities where
you want to be more aggressive in your
trading. I find that to be the best way to
succeed in the business.
To obtain the most information
possible, one has to realize that they're
competing with professionals that have
been in the markets for 5, 10, or 20
years. A lot of people come in to trading
with the equivalency of a grammar

school education and they think they can

compete with people who have master's
degrees and beat them at their game.
Most cases, that's not a possible way to
approach it. You have to do your
research and study and learn everything
on earth about that market to be able to
get the upper hand.
Dr. Hans Hannula
Cash in on Chaos
Two things come to mind. The
first is persistence. I asked one of the
best traders I know how long it took him
to learn to trade consistently well and he
said 20 years. It's a self-taught and
difficult profession.
The second thing that comes to
mind is the first three rules of
commodity trading:
1.
Cutting losses
2.
Cutting losses
3.
Cutting losses
The rule I use for cutting losses is
that as soon as I am in a position, I'd put
in a stop that is that at a fixed loss point.
My stop point is based on what I
consider as being beyond the short-term
noise. For example, I may be looking for
a move of three points. But while the
market is making that three points, it's
going to squeeze all around a lot. I
measure the average reaction of the
shorter duration moves and place a stop
about 1.5 times the average length of the
shorter moves. I tried to get into a
position that's going to last several days
and I know that if it moves against me
more than half a point that I'm wrong.
As soon as a position moves in my
favor, I'll advance the stop.
You have to consistently worry

about cutting losses. If you do that, the

wins will take care of themselves.

David Mefford
AXCES

Robert Jubb
Tomorrow's Commodities

Obviously, it is to get the

direction of the price movement correct.
There are a number of fairly reasonable
indicators for that. Nonetheless, no
matter how good a trader is, they're going
to get it wrong. Basically, it is a
question of being right more often than
being wrong. The key here is to have
reliable indicators which you believe hold
up across different kinds of markets:
bullish, bearish, sideways, and so on.
This means that you must be
testing these indicators across many test
periods containing all kinds of market
conditions. Alternatively, and I don't
know many people to do this, it seems
reasonable to use certain indicators that
would indicate bullish behavior and
different indicators that show bearish
behavior.
I'm a very short-term person of
the important trend to me is the shortterm trend. To me, I want to have a
turning point or when the current trend
is going to continue. For example, you
can use the classic case of open interest
and whether it's increasing or decreasing.
That doesn't work all the time but it's a
reliable indicator whether the market is
going to strengthen or not. Any kind of
indicator like that correlates with price
movement at least 70%. 70% would not
be a good enough percentage for me so I
look for indicators that correlates greater
than 70%.

Risk control. We only give one

trade recommendation in each of our
letters so at the end of the year we will
only have about 23 to 24 trades in 24
issues. We never risk more than $1000.
I'm not saying that we don't have a gap
opening below our stop and we lose
more than $1000 occasionally but our
standard is $1000 risk per trade. In the
beginning of the trade, we simply use a
straight $1000 stop. We don't consider
what the chart points are. Then, in the
next issue, we will adjust the risk to
anywhere from $1200 down to $800 risk
by putting the stop at the most logical
support area. We like to go slightly
below the support area. But we do not
initially risk more than $1000.
We found that the $1000 is a
very good rule of thumb. When we
started 21 years ago, we were going after
$10,000 accounts, which were quite
common in 1975. That gave us 10 trades
where we hopefully wouldn't have such
a record that we would wipe people out.
That's where it started and we found it
to be pretty useful and successful so
we've left it alone.
The only other thing I'd mention
is that if you're trapped in a limit move
then you can use the options to try to
reduce your losses. That doesn't happen
very often and is nearly impossible to
bring up in a newsletter. We have used
that approach on our hotline when we
were trapped in something.

Dennis Minogue
Minogue Stock Index Futures
Hotline

For me the key is selection of

your market. This is very important.
This is been my edge in the stock index
market. This is the market that I have
found to be the highest quality in terms
of producing consistent profit and having
consistent patterns that allow the
possibility of making money.
One key pattern is a 200-yearold ongoing bull market in stocks. There
is no other market like it for consistency
of direction and probability of going in
one direction, up.
Also, I know it sounds
hackneyed but cut your losses and let
your profits run. There are lots of little
sayings like that. But for me the biggest
single reason for my success is selecting
the right market to trade. I'm projecting
that I'll continue to be successful because
of the market that I'm playing within.
Russell Sands
Turtle Talk
Cut your losses, hold onto your
profits, have good discipline because if
you make a silly mistake it will kill you.
CTCR:How do you acquire discipline?
The hard way is to screw up.
There's an old German saying that if it
doesn't kill you it makes you stronger.
Seriously I don't know how to acquire
discipline. Either you acquire it at an
early age through training. Some of the
best traders, I've found, are professional
gamblers or have a military background
or a professional or collegiate sports
background. Because to be an athlete
you have to have discipline to stay in
training and so on.
The other way, if you're not
fortunate to have one of those

backgrounds, is to not have discipline for

awhile and to realize how much it cost
you and how dangerous it is and try not
to screw up again.
Cutting losses is part art, part
science, part technical analysis, and part
money-management. You have to figure
out where to put your stops. You've got
to figure out where to place stops based
on chart structure. You have to figure
out how much you're willing to lose. Or
you sit down with Richard Epstein's
book, Theory of Gambling and
Statistical Logic, (editor's note: the
publisher says it is not out of print but
"out of stock indefinitely") if you are
smart enough to do that, which I am not.
You go through all the risk of ruin
calculations and you say, OK, how big
can I afford to bet; how much can I
afford to lose if all my positions go
against me and still have a less than x
probability of busting out?
Once you figure those things out,
which I think is half the battle, and then
the other half of the battle is actually
honoring those stops. It's a problem that
a lot of people have. I've done it and I'm
sure you've done it. You figure out
where your stops are and yet you don't
get out when the market trades down
there. We never called in your stops or
you tell yourself you're going to have a
mental stop and just watch it. Or you
put in your stop and when the market
gets close you pull it back. "I'll give it a
little more room to see what happens."
And that just never works.
Craig Solberg
Trade Winds
In our minds, the key to success

is knowing the weather forecast. We

have a trading philosophy where we look
at the weather every day, keep track of
how the commodity markets are looking
at the weather at the time, and then we
look at our forecast and try to initiate
profitable trades.
Especially in this time of year in
the grain markets, basically, if you don't
know the weather forecast, then you
don't have any business trading the grain
markets. This can also be important in
other commodity areas during other
times of the year. For example, heating
oil and natural gas. If you don't know
the weather forecast for the Northeast
and Midwest, you really have no
business trading those markets either.
We are really trying to search out those
markets that are trading a weather
forecast and use our weather forecasting
expertise to try to recommend profitable
trades in those markets.
In general, you have to stick to
the old axioms: cut your losses and let
your profits run. When it comes to your
losses, you should only hold a trade for
as long as you're financially able to. You
have to live to fight another day. You
have to let the market tell you when
you're obviously wrong about a trade
and exit the position and have enough
financial wherewithal to fight another
day. You can't risk your whole life
fortune on just this one trade.
We try to let the weather forecast
tell us when to ask in a position. We do
use stops in such a situation as, say, we
are looking for a drought breaking rain in
some portion of the world, we enter a
short position and place a protective
stop just in case the market doesn't
believe our forecast or doesn't want to

trade off weather forecasts. The charts

play into our thinking on stop
placement. We look at
support/resistance, trend lines, and so
forth, just like anyone else.
Stan Tamulevich
Market Line Update
Discipline. You write your rules
the day before any stick to them. Write
the trade plan the day before and you
follow it to the letter. I quite frankly
wouldn't trade without some kind of
game plan or trade plan. If you don't
have the discipline to do that then you're
in trouble.
CTCR: Can you develop discipline?
Absolutely. You can wake up in
the morning with the idea you're going to
follow the plan. My discipline is that I
put all my orders in before the opening.
You have a game plan of what you're
going to deal if any of your orders are
executed.
Our approach may not be the
best approach but it is a good approach.
You see, the average investor is not close
to the market and it's much easier and
better for him to check in once a day.
He's going to be busy with his job and
doing other things. So he has his game
plan written, it's much easier and much
less emotional. He doesn't have to stay
in touch with the markets and doesn't
have to be concerned with every tick.
It's a great way to trade without over
indulging yourself in your time
commitment.
Jerry Toepke
Moore Research Center Report

The key to me is risk

management. I think that the point that
comes most to mind to me is keeping the
dollar risk on each individual trade to
that equilibrium point where the dollar
risk is relatively low but still wide
enough so that you don't get knocked out
by noise. So, rather than the future of
your account being placed on one good
or bad decision, it is instead based on
five or 10 decisions. Instead of having
just one decision ruining your account, it
might take 5, 6, or even 10 wrong
decisions to ruin your account such that
it takes only one or two of those
decisions to be good to keep you in the
ballgame. In other words: survival.
CTCR: How do you pick that fine line or
equilibrium between low risk and not
getting knocked out?
That's going to be up to each
individual based on their individual
financial resources. How much of your
total financial resources have you
committed to trading. How much is
being kept in reserve. But in general,
picking logical chart stop placement
points is the idea. These points should
be well defined rather than I'll risk
$5,000 on this trade or $2000 on this
trade with no real logic other than taking
an arbitrary amount.
I'm not a fan of ideas like dividing
your account into 10 different sections
and risking one section on each trade. I
would much prefer to go the route of
taking a chart point. You have some
market action to help guide rather than
just the money management.
Nick Van Nice
Commodity Trend Service

The key is good money

management to start with. Secondly, it
takes at least $25,000 in capital. I think
you have to have a mechanical
systematic approach. I don't believe in
subjective charting methods. I don't
really believe in a holistic technical
approach.
CTCR: But you sell a chart service.
The chart service is for timing
and it's for looking for opportunities in a
passive way. I think you have to have a
mechanical systematic approach like our
Commodity Trend Service system. For
money management, I use the 1% rule. I
try to limit my loss on any one trade to
1% of my equity.
I think a real critical part too it is
market selection. I don't think you can
randomly select markets to trade or limit
yourself to certain markets to trade. I
select my markets to trade using our
market selector program. This program
basically crunches the formulas that it
runs. The selector is based on all the
momentum and trend. It gives me a list
of buy markets and sell markets. I do
that as my first step of trade selection. I
need at least six months of trend before I
will even consider a trade and that trend
needs certain momentum characteristics.
The only type of trading we even
recommend anymore is long-term trend
following. Let me add that a caveat to
that. Just because we use a long-term set
up doesn't necessarily mean that we have
a long-term orientation with our exit. I
believe that as long as you have that
long-term trend component to set up
your trade, you can do day trading,
swing trading, or whatever as long as it is
in the direction of the trend.
To capsulate:1. Money-

management, 2. Market selectionsystematic and scientifically based 3.

Dynamic portfolio. By dynamic
portfolio, I mean using only those
markets that have been selected by the
market selector. This is guaranteed to
catch the major trends if we have big
trends during the year but won't trade
much if there aren't big trends.
Money management is still
number one because no matter how good
you are you will be out of the game if
you are risking 5-6% of your account on
each trade. Then select markets that are
showing good trends. As far as
diversification is concerned, I don't
necessarily believe in diversification as
the purist would, saying it has to be in
all sectors all the time. I say you have to
be in the sectors that are trending and
only those that are trending.
CTCR: How do you respond to the
criticism that by the time you have
identified the trend it's over?
That's simply not true. Most
trends that we look at are from 1 1/2 to
3 years long and my method gets on
within six months. For example, we've
had a big downturn in bonds this year
and we were getting short in April. The
grains have been on our list for the last
several months.
It's very hard to make money in
the commodity markets if you're looking
for two to three month moves. I think
that to make money you have to be
focused on trend components that have
been in existence for at least six months.
I think they are likely to continue longer
than that.
CTCR: So, using your products, I would
use the market selector to determine
which markets to trade. Would I use

your chart book to time my trades or

your CTS system?
You use the chart books...
CTCR: But do I need the chart book?
Why don't I just use the CTS system?
It's kind of nice to have a picture
to see support.
CTCR: But I could just use the CTS
system? Didn't you say it should be
mechanical rather than holistic?
The money-management and
market selection have to be mechanical.
However, the timing is when the
instincts and discretion of the traitor
comes into play. And that's where we
supply 60 minute and daily charge for
that. I think that if you have that in
order, Courtney, you're more likely to
have success in charting. But a lot of
people have tried to use charting as the
mother tools for the whole thing, and as
you know, there's a plethora of pitfalls
involved with it.
Russ Wasendorf
Futures Factors
Know which way the market's
going. What's so complicated about
that?
Actually, I think what I just said
is wrong. The real key is survival. I
think that the primary objective for
anyone trading the markets is to first
survive. I equate taking a position in the
futures market, or any market for that
matter, as if you were shipwrecked on a
desert island. You don't know what the
consequences of your position will be; of
being on this deserted island. You do
know that if you don't survive, there's no
way that you'll be there when your ship
comes in.

Even the most astute analyst,

armed with whatever information is
available, will not necessarily be
successful even knowing where the
market's going to go unless they first
survive.
Money-management is the key
technique for survival. I can't imagine
anybody trading the market without
having a system for establishing stops.
These can be actual stops in the market
or some kind of threshold mechanism but
there has to be some type of mechanism
whereby you can admit you're wrong in
the position and walk away with some
of your resources.
We use the band method for
setting stops that follows the market. It
calculates for current volatility. It tends
to get closer to a position once a position
has run for a period of time. It's a rather
complicated algorithm but basically what
it is doing is letting the market dictate
what kind of money management
technique needs to be applied. It's
similar to the Welles Wilder Parabolic
Stop Technique except that it will
actually back off from the market if the
market becomes too volatile. This
effectively filters out random noise from
stopping us out.
Larry Williams
Commodity Timing
Knowing the future.
To which I would also add that
God doesn't seem to want man to know
the future very well. So there must be a
reason for it.
I think the key is what I'll call
contextual trading. It's not enough to
know technical stuff because the

technical buy signal is a buy signal is a

buy signal. Some buy signals, from a
technical system, are better than others.
So you need to put that in the context of
the markets, uh, call it fundamentals,
heaven forbid, or your own bullishness
or bearishness. You need to trade within
a context. Use technical things within
the context of a grander view of the
market.
For example, a buy signal when
the commercials are very bearish is not
nearly as strong as a buy signal when the
commercials are very bullish. That
would be a classic example of context.
Traditionally, technicians have said that
you don't want to take a buy signal in a
downtrend but you do want to take a
buy signal in an uptrend. That is kind of
what I call contextual trading but you're
still the doing price with price and you
need to get to the real cause of the
market's moves.
CTCR: That sure sounds like
fundamentals to me.
Sure. It's got to be. Absolutely.
If you take a buy signal in a stock that
has declining earnings and heavily in
debt, that technical buy signal will not be
as good as one in a stock with increased
earnings and no debt. So I think we need
to learn from our brethren doing the
technical stuff in the stock market. We
need to wise up and say, "You need to
look at the setting of the stage". First
you measure the bullishness or
bearishness of the fundamentals,
however you measure it, and then bring
in the technicals for timing.
One of the indicators should be
giving you a grand view of the market:
"It's going higher." The other one than
comes in and says: "Now is the time."

The fundamentalists have never known

when it's going to be going higher. Still,
we need to listen to them and bring in
our technical stuff.
In my own trading ideas what I
think of as fundamentals: commercials
and spread relationships-premiums and
discounts. I've written about that for
years, since 1969. All that stuff has held
up very well in the ensuing years.
Premiums do matter. Whether the
commercials are long or short does
matter. It's hard to understand the
commercials; it's taken me a long time to
figure out that they're clearly a dominant
force in the market. Investor sentiment
is one of the very best indicators in the
stock market and works beautifully in
this market. Seasonals, that you've
written about, are definite context that
needs to be looked at.
I think this is much more of a
thinking game than technicians are willing
to give it. You have to think. There are
no black boxes that are the end-all and
be-all and give the signals. You have to
say, "What's the context here?" Then
bring in the timing guns.
Norm Winski
Astro-Trend
Obviously discipline. Have a
plan and follow your plan. Also timing.
One thing that I find helps
people and helps myself is this simple
thing of writing down your trades that
you want to do rather than just calling
them into your broker. Write them
down first. It's like you have to be two
people. There's the guy who does the
analysis and thinks of a trading plan.
That you act like your own broker. You

put on another hat and near the robot. A

guy who just follows instructions. So
you write all this down on a piece of
paper and then the robot takes over and
just reads the instructions to the broker
with no thinking aloud. You use
different parts of your brain.
For timing, I use cycles. Mostly
planetary cycles. By studying the
markets over a long period of time we
can develop and see patterns develop as
the planets get into certain positions.
For example, I wrote a trading manual for
1996/1997 last fall and I saw the planet
Jupiter, which has an 11 1/2 year cycle,
was going to enter the sign of Capricorn
on January 3, 1996. My research shows
that Capricorn has a great affinity with
the coffee market. Knowing past
patterns, I projected that that should be
a major turn and probably a major low in
the coffee market. As it turned out, that
was the low day in the coffee after a long
decline from 2.71 down to .90.
The Bottom Line
I found the interviews above
fascinating and useful. I was somewhat
surprised at how little self-serving
comments were made.
The experts we interviewed are a
disparate lot. Some have been in the
market for over 30 years, other are
relative newcomers. Their time horizons
range from nearly day trading to one
adviser who only has a couple of traders
per year. Their techniques range from
astrology to classic fundamental analysis
to pure technician.
Yet the responses concentrated
on two main themes: risk management
and market selection.

Stop and think about it. Here's a

bunch of guys who are selling their
market timing yet they mainly focus on
the risk management as the key to
success. That alone is a major take-home
message.
I have always thought that the
most important skill for success in
futures trading is the psychological
aspect of trading. Risk management is
second and market timing comes at a
distant third. What good are great
trading techniques if you don't have the
self-discipline to actually use them?
Trading successfully seems to be
against human nature. Risk management
is a codification of methods of
controlling our emotions. Few traders
are born, most are made.
I have a good friend who simply
cannot make money trading futures. He
is clearly smart enough. He knows some
profitable techniques. But he still loses
money consistently. Why? Because he
can't admit that he is wrong. He would
rather be right than make money.
A couple of years ago, he
purchased the pile of S&P 500 puts.
Well, actually he bought more than a
pile; he put his net worth on a bet that
the stock market would go down.
This might be even an okay
strategy and tactic if he had cut his
losses quickly. But he didn't and busted
out. He told me just wanted to wait a
little longer to see if it would go in his
direction. Famous last words.
This is what I mean by
psychological coming first. Risk
management rules are largely a
mechanism to try to overcome our
emotions when it comes to trading. Take
me for example. I always put in a

protective stop order when I get filled on

a trade. Since I trade usually for an
intermediate or long-term timeframe, I
even put in the stop orders good till
canceled.
I do that because I know that I
cannot trade without the discipline of the
resting stop order. The resting stop
order allows me to be much more
objective about the market and allows me
to sit through losing positions without
concern. My stop will take me out of the
position.
It took me a long time to become
a profitable day trader. I had trained
myself to be a profitable position trader
at largely using breakouts. I would buy
breaks of previous highs and sell breaks
of previous lows. I found this to be
relatively easy.
Day trading, on the other hand,
befuddled me. I kept trying to use my
breakout techniques on day trading and
consistently lost money. Eventually, it
sunk in on me than I had to buy dips and
sell rallies. (See, you can teach old dogs
new tricks.)
This was psychologically hard
for me because I would find myself
psychologically "depressed" when the
market was dropping and I had to buy
and was the" elated " when the market
was rallying and I was supposed to be
selling.
There's an old saying, "When
you're yellin', you should be sellin', and
when you're cryin', you should be
buyin'". But this is hard to do. My
emotions and actions were not in sync
with each other.
I have finally gotten to the point
where I can make money day trading but
I still find it very hard emotionally.

Many people have the same

problem position trading. I mentioned
my friend earlier who would rather be
right that make money. He simply
couldn't take a loss. That would be
admitting he was wrong.
This is where risk management
comes in. Risk management is, to me, a
psychological tool to overcome our
desire is to hold onto positions for far
too long. Consistently hanging onto
losers will bankrupt you. Risk and
money-management rules, if applied, will
enable a trader to overcome their natural
desires to "give the trade a little more
time".
Russ Wasendorf said it most
succinctly when he said that "The real
key is survival." Proper risk
management can ensure that survival. He
goes on to say, "You do know that if
you don't survive there is no way you'll
be there when your ship comes in."
Risk management is playing
defense. Trading technique is playing
offense. In trading, defense is probably
most important. You have to stay in the
game to win it.
Some people may say that this is
banal and trivial and that everybody
knows this. You know what, I agree.
But is still of critical importance.
Knowing something and being able to
actualize it are two different things. I
have been trading professionally for
about 20 years but still find it useful to
remind myself of these very deep and
powerful truths. I have met very few
professional traders to feel otherwise.
I feel it is a great attribute to our
advisers that they concentrated on this
feature before talking about trading entry
and exit rules.

The second and most important

key to our advisers with the selection of
the market. Is this a bull market or a
bear market? The feeling was that
knowing the trend was the most
important thing in that entry and exit
rules came after that.
The idea seems to be that if you
know the trend, almost any entry and
exit technique will work or will be
greatly enhanced. For example, nearly all
trend following systems make money in
big bull and bear markets and get
chopped up on the counter trend moves.
Knowing that the trend was bullish could
enable you to not take short positions on
bare signals but simply stand aside. This
would obviously greatly enhance
profitability. Of course this is easier
said than done though several advisers
offered ideas on how to select only those
markets with strong trends.
I found it interesting that the
advisers do not seem to like
diversification. They more advocated
concentrating your bullets in a few select
trending markets.
So, the two main keys to futures
trading success are:
1.
Control your risk.
2.
Select your markets.
Good Trading!
Risk management is, to me, a
psychological tool to overcome
our desires to hold onto positions
for far too long.

CTCR, Inc.
P.O. Box 7603
New York, NY 10150-7603
Call Courtney Smith direct at (212) 358-9772
www.ctcr.investors.net
[email protected]