· Cut losses short. Most importantly, cut your losses short, let your profits run. It sounds simple, but it isn't. Let's look at some of the reasons many traders have a hard time "cuttings losses short." First, it's hard for any of us to admit we've made a mistake. Let's say a position starts going against you, and all your "good" reasons for putting the position on are still there. You say to yourself, "it's only a temporary set-back. After all (you reason), the more the position goes against me, the better chance it has to come back – the odds will catch up." Also, the reasons for entering the trade are still there. By now you've lost quite a bit; you sell yourself on giving it "one more day." It's easy to convince yourself because, by this time, you probably aren't thinking very clearly about the position. Besides, you've lost so much already, what's a little more? Panic sets in, and then comes the worst, the most devastating, the most fallacious reasoning of all, when you figure: "That contract doesn't expire for a few more months; things; are bound to turn around in the meantime."So it goes; so cut those losses short. In fact, many experienced traders say if a position still goes against you the second day in, get out. Cut those losses fast, before the losing position starts to infect you, before you "fall in love" with it. The easiest way is to inscribe across the front of your brain, "Cut my losses fast." Use stop loss orders, aim for a Rs. 5000 per contract loss limit...or whatever works for you, but do it.
· Let profits run. Now to the "letting profits run" side of the equation. This is even harder because who knows when those profits will stop running? Well, of course, no one does, but there are some things to consider. First of all, be aware that there is an urge in all of us to want to win...even if it's only by a narrow margin. Most of us were raised that way. Win – even if it's only by one touchdown, one point, or one run. Following that philosophy almost assures you of losing in the futures markets because the nature of trading futures usually means that there are more losers than winners. The winners are often big, big, big winners, not "one run" winners. Here again, you have to fight human nature. Let's say you've had several losses (like most traders), and now one of your positions is developing into a pretty good winner. The temptation to close it out is universally overwhelming. You're sick about all those losses, and here's a chance to cash in on a pretty good winner. You don't want it to get away. Besides, it gives you a nice warm feeling to close out a winning position and tell yourself (and maybe even your friends) how smart you were (particularly if you're beginning to doubt yourself because of all those past losers).
· That kind of reasoning and emotionalism have no place in futures trading; therefore, the next time you are about to close out a winning position, ask yourself why. If the cold, calculating, sound reasons you used to put on the position are still there, you should strongly consider staying. Of course, you can use trailing stops to protect your profits, but if you are exiting a winning position out of fear...don't; out of greed...don't; out of ego... don't; out of impatience...don't; out of anxiety...don't; out of sound fundamental and/or technical reasoning...do.You can avoid the emotionalism, the second guessing, the wondering, the agonizing, if you have a sound trading plan (including price objectives, entry points, exit points, risk-reward ratios, stops, information about historical price levels, seasonal influences, government reports, prices of related markets, chart analysis, etc.) and follow it. Most traders don't want to bother, they like to "wing it." Perhaps they think a plan might take the fun out of it for them. If you're like that and trade futures for the fun of it, fine. If you're trying to make money without a plan – forget it. Trading a sound, smart plan is the answer to cutting your losses short and letting your profits run.
· Do not overstay a good market. If you do, you are bound to overstay a bad one also.
· Take your lumps. Just be sure they are little lumps. Very successful traders generally have more losing trades than winning trades. It's just that they don't leave any hang-ups about admitting they're wrong, and have the ability to close out losing positions quickly.
· Trade all positions in futures on a performance basis. The position must give a profit by the end of the second day after the position is taken, or else get out.
· Program your mind to accept many small losses. Program your mind to "sit still" for a few large gains.
· Learn to trade from the short side. Most people would rather own something (go long) than owe something (go short). Markets can (and should) also be traded frown the short side.Watch for divergences in related markets – is one market making a new high and another not following?
