8 Common Mistakes New Futures Traders Make

 

Venturing into the world of futures trading can be an exciting yet daunting experience for new traders.

While the potential for profit is enticing, it's crucial to avoid common pitfalls that can lead to costly errors.

In this blog, we'll explore the top eight mistakes that beginners often make, and how you can steer clear of them to ensure a smoother trading journey.

1. Trading without a plan

One of the biggest mistakes new futures traders make is jumping into trading without a well-defined plan.

Without a solid strategy in place, it's easy to get caught up in emotions and make impulsive decisions. This can lead to unnecessary losses and impact your overall progress.

Before entering any trade, it's essential to have a clear plan that outlines your entry and exit points, risk management strategy, and profit targets. Stick to your plan and avoid making spur-of-the-moment decisions based on fear or greed.

How to create a simple trading plan

Start by setting achievable objectives and outlining your entry and exit rules.

Let's say you'd like to trade crude oil futures. You might aim for a 5% return on your initial investment over the next month.

You could decide to open your position when the price breaks above a specific moving average or technical pattern. For exits, you might decide to sell when the price reaches a target 3% above your entry or if it falls 3% below its current market price via a stop-loss order.

Regularly review and adjust your plan to align with changing market conditions.

2. Misunderstanding leverage

Leverage is a powerful tool in futures trading, allowing traders to trade more significant positions with smaller capital. However, this also means that losses can escalate quickly if the market moves against you.

New traders often make the mistake of using excessive leverage without fully understanding the risks involved. It's crucial to educate yourself on leverage and use it wisely to avoid catastrophic losses.

 

How much leverage should I use?

The amount of leverage used will depend on your risk tolerance and trading strategy. As a general rule, it's recommended to start with low leverage levels and gradually increase as you gain more experience.

It's also important to regularly review your leverage usage and adjust according to market volatility and risk appetite.

Managing leverage effectively

To avoid over-leveraging, trade within your means and maintain a conservative approach.

Use leverage ratios that align with your risk tolerance and never risk more than you are comfortable with.

3. Ignoring margin requirements

Futures trading involves margin, which is the amount of money required to open a position.

New traders often make the mistake of not understanding or ignoring margin requirements, leaving them vulnerable to unexpected losses via margin calls.

It's crucial to educate yourself on margin requirements for different markets and ensure you have sufficient funds in your account to cover potential losses.

Calculating margin requirements

Different futures contracts will have varying margin requirements depending on the contract size and market volatility.

You can find information on specific margin requirements from your broker - FXTM's margin requirements are outlined here.

To calculate the minimum required margin for a trade, multiply the contract size by the price by the initial margin percentage set by the exchange.

You can also use our handy margin calculator for free.

Strategies to avoid margin calls

Keep a buffer in your account to absorb market fluctuations, and monitor your balance regularly. This proactive approach ensures that you're not caught off guard by unexpected margin calls.

4. Failing to use stop losses

Stop-loss orders are a crucial risk management tool in futures trading, enabling traders to limit potential losses on a trade.

New traders often make the mistake of not using stop-losses or placing them too close to their entry point. This leaves them vulnerable to unexpected market movements and significant losses.

Why you need stop losses

Stop-loss orders serve as insurance against sudden price fluctuations that can lead to significant losses. They help maintain discipline and prevent emotional decision-making in times of market uncertainty.

Without stop-loss orders, traders expose themselves to potentially severe losses. Real-world examples have shown how quickly losses can escalate when no safety net is in place.

How to set effective stop loss orders

Balance risk and market volatility by setting stop-loss levels that allow for normal price movement while protecting your capital. Regularly review and adjust these levels as market conditions change.

5. Overtrading

New traders often make the mistake of overtrading, driven by fear of missing out on potential profits or chasing losses.

Overtrading can lead to exhaustion, stress, and emotional decision-making, which can ultimately result in significant losses.

 

Why overtrading Is detrimental

Frequent trading can erode profits through transaction costs such as commissions and spreads. Moreover, it can also hinder focus and discipline necessary for successful trading.

Traders should aim to maximise quality trades rather than quantity. This requires a well-defined strategy that incorporates patience and discipline.

How to avoid overtrading

Create a plan that outlines your entry and exit rules, risk management strategies, and profit targets.

Set daily trade limits and focus on high-quality trades rather than quantity. This approach helps maintain your trading discipline and enhances decision-making.

6. Trading without understanding the market

Many new traders make the mistake of jumping into trading without fully understanding the market they are entering.

It's crucial to educate yourself on the fundamentals and technical aspects of your chosen market, as well as staying up to date with current events that may impact prices.

Why market knowledge is essential

Without a solid understanding of the futures market, traders risk making impulsive and uninformed decisions. This can lead to significant losses and missed opportunities.

Moreover, having a thorough knowledge of the market allows for more effective strategy development and risk management.

How to stay informed

Stay informed by regularly reading financial news and analysis related to your chosen markets. Utilise technical analysis tools to identify trends and patterns, which can inform your trading decisions.

Additionally, consider joining online communities or forums to discuss market trends and insights with experienced traders. This can help broaden your knowledge and improve your trading strategies.

Successful trading requires a deep understanding of underlying assets and market drivers. Failing to conduct thorough research can lead to ill-informed trades.

Tools to stay informed

Utilise news sources, economic calendars, and market analysis to stay updated. You can also check out our beginner's guide to Futures trading here. These resources help you make informed decisions based on current market conditions.

7. Letting emotions drive decisions

 

Emotions can significantly impact trading decisions, often leading to impulsive and irrational choices.

New traders may experience fear, greed, or a lack of confidence in their abilities, which can all influence their decision-making process.

The impact of fear and greed on trading

Common emotional pitfalls, like revenge trading, can undermine your success. Emotional decisions often result in poor trade outcomes. Fear of missing out can lead to overtrading and taking on unnecessary risk, while greed can cloud your judgement and cause you to hold onto losing positions.

Tips for staying disciplined

Practices such as journaling, mindfulness, and adhering to your trading plan can help keep emotions in check. Consistent discipline leads to more rational and profitable trading decisions.

8. Ignoring expiry dates and settlement rules

Finally, don't forget about the rules of your trade.

Futures contracts have specific expiry dates and settlement rules that traders must adhere to. We outlined how it all works in our what is futures trading article.

New traders may overlook these critical factors and face unexpected losses or missed opportunities if they are not aware of them.

Understanding expiry dates and settlement rules

Each futures contract has a set expiration date, after which it is no longer valid for trading. Traders need to either close their position before the expiry date or roll over their contract to a new one.

Additionally, settlement rules dictate how profits and losses are settled at the end of each contract period. Failing to understand these rules can result in unexpected cash flow issues or missed opportunities.

FXTM lets you trade futures as contracts for difference (CFDs) - this means that you can simple rollover your trade when it reaches expiry rather than exchanging and avoid any costly overnight swap charges. One less thing to worry about.

The consequences of holding positions too long

Holding positions beyond their expiry dates can lead to unwanted rollovers and settlement costs. These can erode your profits and complicate your trading strategy.

Use calendars and set alerts to remind you of key dates. This proactive approach helps you manage positions effectively and avoid unnecessary costs.

The bottom line

In the journey towards successful trading, avoiding common mistakes can significantly boost your chances of achieving financial success. Here's a recap of the eight pitfalls and effective strategies to steer clear of them:

1. Trading without a plan: Develop a solid trading plan with clear objectives, entry and exit rules, and risk management tactics. Regularly revise your plan to adapt to market changes.
2. Misunderstanding leverage: Approach leverage with caution. Align leverage ratios with your risk tolerance and ensure you trade only within your means to mitigate risks.
3. Ignoring margin requirements: Maintain a buffer in your account for market fluctuations. Regular balance checks help you avoid unexpected margin calls.
4. Failing to use stop losses: Implement stop-loss orders to protect your capital from significant losses. Adjust them as needed to stay in tune with market volatility.
5. Overtrading: Limit your daily trades and prioritise quality over quantity. This focus aids in maintaining discipline and improving decision-making.
6. Trading without understanding the market: Prioritise research and analysis to deepen your market knowledge. Stay informed through news, economic calendars, and analysis platforms.
7. Letting emotions drive decisions: Keep emotions in check with mindfulness, journaling, and strict adherence to your trading plan to ensure rational decision-making.
8. Ignoring expiry dates and settlement rules: Stay informed of key dates with calendars and alerts to prevent unnecessary costs and rollovers.

By recognising these common errors and applying the counter strategies, you're positioning yourself for a more disciplined and successful trading experience. Remember, continuous learning and adaptation are crucial in navigating the ever-evolving markets.

Ready to take your trading journey to the next level? Start trading futures CFDs with FXTM today and experience the benefits of cutting-edge technology, expert insights, and dedicated support.

Sign up now to access a world of market opportunities, with tools designed to enhance your trading experience. Join a community of informed traders and make your mark in the futures market with confidence. Get started with FXTM and unlock your trading potential!