Futures and options trading presents an enticing opportunity for significant profits, but the complexity and volatility of these markets can easily lead to heavy losses. While there are many who think they have mastered the art of short-term profits, it does not take long for the larger majority to realize that they were mistaken due to a few typical and too easily avoidable reasons. Such mistakes are however necessary to be acknowledged by any individual willing to trade and achieve success in these markets. Here are some unique reasons traders experience losses in futures and options.
Excessive confidence is one of the most common culprits of losses in futures and options. After a few profitable trades, a trader may start to feel that they are on the right side of the market and begin to take too many risks, leverage more powerful positions, or disregard some basic rules of risk management and stop.
One of the traps many traders tend to find themselves in is revenge trading. Revenge trading is a response action when one experiences losses in futures and options. After having a bad trade, rather than waiting for an appropriate opportunity, a trader may try recouping his investment in a rush and otherwise expose himself to risk. The need to recover losses in futures and options can overpower one’s judgment which can lead to irrational decisions.
If one does not have a systematic scheme for risk management, losses in futures and options are a foregone conclusion. Most of the time people will enter the futures and options markets without a plan, issuing emotions and tips as reasons. This may work for some time but most of the time leads to losses in futures and options in the end.
Within the arena of futures and options trading, risk management should be treated as a critical component that many traders choose to overlook. Such bad practices with no proper risk management tend to result in traders losing a hefty fraction of their account balance due to making a rash trade. A lot of traders do not utilize stop-losses or they allow their emotions to come into play and ignore their cut rules for the position.
Time decay is a term that most options traders do not comprehend well. Time decay describes the decrease in the value of an option as expiration approaches, most notably for out-of-the-money options. It means that even if the market behaves in a desired direction, the option’s worth may depreciate even more shortly.
Market noise is associated with transient movements that do not follow or support the prevailing market trend which leads to losses in futures and options. These movements can be caused by other events such as news events, some economic reports, or even mere gossip. Traders who respond to every casual noise in the market end up making decisions based on emotions instead of strategy.
In most instances, many traders commit the error of following one strategy irrespective of the different market conditions. Such rigidity tends to translate to losses in futures and options when there is a change in the market behavior. To remain profitable, traders must evaluate the present market situation and act accordingly.
It is possible to control quite large positions in futures and options trading with a relatively small amount of capital, hence the large returns attainable on quite small capital investment. However, leverage increases the amount of returns, but it equally increases the losses in futures and options. When excessive leverage is utilized, traders are exposed to the risk of margin calls – situations whereby they are required to inject more funds into their positions.
Markets make huge movements and large price swings, which means the opportunity of high profits and high losses in futures and options, is always present in futures and options. It is wild swings in some expectations that create real chances and risk to the upside and downside, respectively. The majority of traders who usually do a low estimation of the volatility try to trade high leverage which can lead to large and worsened stick-over price movements.
Most traders’ decisions are shaped by two emotions only: fear and greed which lead to losses in futures and options. Those fears might account for a complete exit from a position too soon to make a decent gain. Greed on the other side creates heads out of competitors and leaves great damage behind, some might think high risks mean larger returns, no matter the collateral damage.
Highlight your game plan, specify your entry points, and exits, and set rules to limit your risk. Make sure you don’t make any rash decisions when it’s extreme.
Moderate loss for every trade and position, to begin with, must be isolated completely with small losses in futures and options, so capture weightage returns selling only about 2-3 percent of each trade out.
Be aware when your feelings, especially fear and greed, work against the rational part of your brain. Cool off after a negative result and refrain from trading as a way to ‘recover’ your losses in futures and options.
Be in a position where you can change and adjust your game plan according to the market’s mood and the volume of activity. Do not use the same system in all market settings.
Keep learning about new strategies, market behavior, and risk management. Analyze both successes and failures to improve your future trades.
There are many reasons why traders have losses in futures and options, but some traders have even classified them into: Psychological reasons, discipline, and strategic reasons. Traders face many reasons such as confidence bias, revenge trading, and risk which can be avoided if a trader has a coherent approach. Strategies are invaluable, but they must be complemented with proper risk management and emotional control. And finally, if these areas are addressed and integrated into your strategy, your chances of success in the frenetic pace of the futures and options market will improve.
If you want to know more about Risk Management & Intraday Trading Strategies you can refer to our previous blog on Importance Of Risk Management In Trading and 10 Best Intraday Trading Strategies.
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