50 Futures Trading Rules

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50 RULES OF

FUTURESTRADING


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Copyright 2009 Commodity Research Bureau www.crbtrader.com Page 1

50 Rules of Futures Trading

IntroductionFewer than 25% of all people who trade futures are successful. Yet,

even among the 25% who are successful, some traders consistently makehundreds of thousandseven millions of dollarseach year. What is it these

millionaire traders are doing so differently? Thats exactly what we askedsome of the industrys top traders.

Their answers resulted in the following 50 Principles of Trading. A fewof these principles already may be familiar to you, while others may goagainst everything youve ever heard. In any case, the most important thingto remember is not what set of rules you use, but to always maintain yourtrading discipline.

Once you have developed discipline, you then can begin learning andapplying these principles to make your trading experience more rewarding.
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from outside in uences. That meansit is absolutely imperative your tradingfreedom is not in uenced by the fear oflosing money you have earmarked forsomething else.

With that in mind, it is best to viewspeculation funds as money you canafford to lose. Your position shouldbe carefully analyzed so you never

jeopardize other funds or assets.

Use only money you can afford to lose.

If you are speculating in futures with funds you need for other

things, you are ultimately doomed to failure. Why? Because it isvirtually impossible to make sound decisions if you are trading withscared money. One of the keys to successful trading is mentalindependence. You must be able to trade with a minimum of static

Know yourself.

To be successful, you must possess anobjective temperament and an ability to controlyour emotions. Losing your cool almost alwayswill lead to disaster. Although trading disciplinecan be developed, the most successful tradersusually have a personality that allows them toremain unemotional about their positions. Itis suggested that people who are not able tocontrol their emotions are better off looking elsewhere for pro ts.

There are many exciting things happening in the market everyday. It takes a hard-nosed attitude and an ability to look beyondshort-term circumstances to avoid the temptation of changing yourmind (and your position) every few minutes.

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Start small.

Test your ability rst by making some trades on paper. From

there, begin trading in small lots (1,000 to 3,000 bu. of grain, forexample). If your broker doesnt offer smaller lot contracts, startwith a commodity like oats (which is less volatile than pork bellies,currencies or index futures). No matter which markets you choose,its wise to become thoroughly familiar with the mechanics of tradingbefore graduating to larger contracts and/or more volatile markets.

Dont over commit.

Another rule many successful traders suggest is to keep threetimes the money in your margin account than is needed for aparticular position - even if that means reducing your position.Viewed another way, this means you shouldnt commit more thanone-third of your account balance on any single position. This rulehelps you avoid making trading decisions based on the amountof money in your margin account. If you nd yourself undermargined, you may be forced to liquidate a position early, mosttimes at a costly loss that might have otherwise been avoided.

Isolate your trading from your desire for pro t.

Dont hope for a move so much that it clouds your vision. Although hope is a wonderful virtue in other areas of life, it is oftenthe enemy to a futures trader.

Successful futures speculators are able to separate theirtrading from their emotions. When hoping that the market will turnin their favor, beginning speculators often violate even the mostbasic rules of trading.

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Dont form new opinions during trading hours.

Decide on a basic course of action, then dont let the up and

downs that always occur during the Trading day affect your gameplan.

Decisions based on price moves or news items are usuallypoor ones. You are always better off formulating an opinion beforethe market opens, then looking for the proper time to execute adecision based on that opinion. When speculators completelychange their direction during the trading day, it often generateslarge commissions for the broker, but very little pro t for the

traders.

Take a trading break.

Trade every day and youre almost certain to dull your judgment.One successful trader commented, When I fall to 90% of mentalef ciency, I begin to break even. Anything below that and I start tolose.

A trading break allows you to step back and take a fresh look atyourself and the way you want to trade for the next several weeks.Sometimes you get so close to the forest that you cant see thetrees. A break in the action will help you view market factors from anew perspective, and often in a much better light.

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Dont follow the crowd.

Successful traders need breathing room.

When everyone seems to be going long, theylook for a reason to go short. Historically, thepublic is usually wrong. Most good tradersfeel uncomfortable when their position ispopular with the buying public (and especiallywhen its popular with the small traders).

Viewing government reports on theposition of traders can provide helpful clues on overcrowding.

Another clue is contrary opinionwhen most advisory services

are long, move to the sideline or take a short position; likewise,when most advisors are bearish, go long.

Some services give a reading on market sentiment determinedby compiling opinions from many advisory services. If 85% of theanalysts are bullish, this indicates an overbought situation. If lessthan 25% are bullish, an oversold condition would be indicated.

Stick to your guns.

Dont be in uenced by what others sayor youll be changing your mind all thetime. Once you have formed an opinionon market direction, dont allow yourselfto be easily in uenced. You can alwaysnd a so-called expert who has logicalreasons for reversing your position. If youstart listening to these outside views, youmay be tempted to change your mind.More often than not, holding your positionwill be more pro table.

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When in doubt, sit out.

Dont feel you have to trade (or even hold a position) every day.

Beginning traders are often tempted to trade or hold a positionevery daya tendency that can be very costly. Successful tradersdevelop the patience anddiscipline to watch and waitfor an opportunity. After theyhave taken a position andbegin to feel uncomfortable,experienced traders usuallyreduce the size of their

position or liquidate. Thenthey wait on the sidelinesuntil the next opportunitycomes along.

Try to avoid market orders.

Placing an order to buy or sell at the market may shownothing more than a lack of discipline. To avoid violating thisrule, consider placing speci c priceorders instead. For example, Buy5,000 bushels of December corn at

$2.20.

If you feel you must liquidateyour position immediately, marketorders can be helpful. However, itsusually a good strategy to minimizetheir use whenever possible.

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Trade the most active option month.

In soybeans, for example, November, March and July are

usually the options with the highest volume and open interest.

Trade divergence between related commodities.

Watch the commodity families (i.e. the grains, the meats,the metals, and so on). Whenever you identify a wide divergence

Trading these active options shouldenable you to get in and out of aposition easily.

A similar caution should benoted for inactive futures. Lowvolume commodities are not themarket for speculators because it

may become dif cult to liquidate aposition when you want to get out.Your broker will be able to offerassistance in this area.

in a group, that could signal atrading opportunity. For example,if all grains except soybeansare moving higher, its a goodidea to look for an opportunityto sell soybeans when grains ingeneral appear to be weakening.The reverse of this is true also.Knowledgeable traders usuallybuy the strongest commodityin the group during periods ofweakness.

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Dont trade too many different th ings at once.

What happens if you do this? Most times youll fail if you try to

have the necessary informationand feel of several differentmarkets. Few traders, forexample, are able to successfullytrade both metals and grains atthe same time, simply becauseboth markets are moved byfactors independent of eachother. Learn to know your

limitations and always tradewithin those limits.

This is usually a good pricedirection clue, particularly aftera major report. A breakout of theopening range may tell you thedirection of trading for the next severaldays. If the market breaks through

the opening range on the high side,go long, say the experts. If it breaksout on the bottom side of the openingrange, go short.

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Trade the breakout of the previousdays range.

This rule is used by many successful tradersto decide when to establish or lift a position. Itmeans never buy until the price trades abovethe previous days close. Followers of a marketmomentum philosophy use this rule, believingthat the weight in the market is in their favorwhen they wait for trading to break out of theprevious days trading range before adding totheir position.

Trade the breakout of the weekly range.

This rule is similar to the daily rule, except it is based on weeklyhighs. When the market breaks through a weekly high, recognize

that as a buy signal. When it breaks through the previous weekslow, it is a sell signal.

Trade the breakout of the monthly range.

The longer the period youre watching, the more marketmomentum behind your decision. So, monthly price breakout arean even stronger clue to price trends and are vital signals for theposition trader or hedger. When prices break out on the top side ofthe previous monthly high, its a buy signal. When the breakout is onthe bottom side of a previous monthly low, its a sell signal.

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Build a trading pyramid.

When you add a position, dont add more contracts at anyonetime than the number of contracts in your base commitment. Letsassume your initial position was 20,000 bushels of soybeans. Anideal situation would be to pyramid by adding 15,000 bushels, then

Never put your entire position on at one price.

If you want to be long 50,000 bushels of corn, you may want todo it in ve installments of 10,000 bushels. That way youll see ifthe market is moving in your direction before you become totally

10,000 bushels, then 5,000 bushels, providingthe market is moving in a favorable direction.

Always avoid the inverted pyramidwhere on each addition you add more thanyour original position. This is an extremely

dangerous trading technique because even aminor market reversal can wipe out pro tsfor the entire position. Your average costis closer to market price in the invertedpyramid situation which makes your position more vulnerable.

Another danger in pyramiding is that of over committing yourself tothe point where you lack suf cient margin money.

committed.

Most traders use the fundamentalsand various technical signals to guidetheir trading, but the most important key ismarket action.

Intelligent traders wait for the market toverify that the initial position was a goodone before putting on their entire position.

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Never add to a losing position.

Regardless of how con dent you feel, you should NEVER add

to a position that is already showing a loss. It may mean you arealready out of step with the market.

Cut your losses short.

One of the most dangerous mistakes many new traders makeis not admitting it when theyre wrong. It takes a great deal ofdiscipline to swallow your pride and resist the temptation to hangon to a loss.

Some traders disagree with thisrule, believing in a price averagingtechnique.

But many traders believe this canbe a risky technique and a way to

mentally justify adding to a positionthat only magni es a mistake. (Seerule #5.)

When the market moves againstyou, admit your mistake and liquidateyour position. You can still makemoney, even if youre correct on less

than half of your trade, as long as youkeep your losses short and let yourpro ts run. Some successful tradersmay have only three or four pro tabletrades out of ten because, throughdiscipline or stop loss orders, they areable to exit a market early when theyare wrong.

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Let pro ts run.

Cutting your pro ts short can be another cause of unsuccessfulspeculating. The old saying you never go broke taking a pro t

doesnt apply to futures trading. The reason: Your losses will outweigh

Avoid holding losing positions.

Never carry a losing position more than two or three days or overa weekend. This rule is used as a way to force discipline. Although

it sounds simple to say cut your losses short, it can be a dif cultrule to follow, even for seasoned traders. Thats why its a good ideato make a at rule on carrying losses. Sticking to this rule is sure tosave you from making substantial losses.

Learn to like losses.

No trader likes losing. But, like it ornot, losses are part of the business. So,when youve learned to accept a losswithout it affecting your pride, youre wellon your way to becoming a successfultrader. The fear of taking a loss must beeliminated before you can reach your fullpotential as a trader.

your pro ts unless you let your pro ts run.

How do you know when to take a pro t? Hereswhere some of the technical rules on reversalsand other chart formations can help. Experiencedtraders say you should never take a pro t just forthe sake of taking a pro talways have a reasonfor closing out a pro table position.

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Use stop orders cautiously.

Stop loss orders are easy discipline. They may help you cut

losses automatically. But remember to place your stop when you

Get out before contract maturity.

The price of a commodity during the delivery month is usuallymore volatile.

place your order. If you dont,you may be tempted to givethe market a few more cents,adding to your potential loss. Besure to use stop loss orders withgreat discretion, because stopsthat are placed too tight can putyou out of the market with a loss

very quickly. You can becomewhipsawed by poor placementof stops.

For that reason, it isrecommended novicetraders move into othercontract positions toavoid any unnecessaryadded risk. The pro tpotential in making andtaking delivery is one thatshould be handled only byexperienced cash markettraders.

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Ignore normal seasonal trends.

Although the price of corn historically goes down at harvest, most

experts dont let seasonal trends in uence trading decisions. Toomany people try to trade seasonal trends, so its usually best to dothe exact opposite. (See rule #8)

Trade the divergence from normal.

This is one of the rules money-making traders rely on regularly.They simply trade the divergence from that which is normally

expected. So, if traders ingeneral believe the marketis bullish but the rallyfails, its usually a goodsignal to sellespeciallyif the activity follows agovernment report. Itssometimes smart to waitfor the general tradingpopulation to lean oneway, and then time a tradein the opposite direction.

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Avoid picking tops and bottoms.

Many a beginner has learned this costly lesson the hard way.

If you believe a market has topped or bottomed and decide to goagainst the trend, you are making yourself very vulnerable. Experttraders suggest you let the market price action prove a top orbottom has been formed before taking an active position.

Buy the rumor, sell the fact.

If market rumors are bullish, then youshould buy when that news hits the streets.But when the new reports turn into reality, it istime to sell the fact.

An example would be news of a potentialgrain sale. Because the market tends tobuild the news into the market price, thisrule would tell you to buy on the rst piece ofnews; then when the grain sale was actuallymade, sell.

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Bull markets die of being overweight.

Theres an old stock market trading rule that says, when pricesget top-heavy, bull markets can fall at from their own weight. So,be especially sensitive to bearish news if youre long.

Look for good odds.

Look for opportunities in which losspotential is small in relation to the pro tpotential. For example, if a market is tradingnear its recent historic lows, it could meana long position has great upside potential inrelation to possible loss. Or if it is trading justabove government price support levels, theremay be an opportunity for a low-risk trade.

Watching the trading range of a marketover a year or several years helps you gainthe perspective you need to help determinethe odds. Market fundamentals are alsohelpful in nding situation with good odds forsuccess.

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Always take windfall pro ts.

Learn to sell short.

Most beginning speculators tend to be bulls, which means theylike to buy markets they think will go higher. Because markets oftenfall faster than they rise, you can frequently earn quicker pro ts byselling short. For that very reason, its important for you to learn totrade from the short side of the market.

Act promptly.

The futures market is rarely friendlyto those who procrastinate. For thatreason, a good rule of thumb is toalways act promptly. This does notmean you should act impulsively.However, if your judgment tells you toliquidate a position, do it immediately.

Sometimes within 48 hoursof taking a position, you havemore of a pro t than you everexpected. Resist the urge towatch the market a few moredays to gure out why the pro tcame so fast. Just take yourquick pro ts and dont askquestions.

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Dont reverse your position.

When your position is a loser andyou decide to get out, dont make an180-degree turn. For example, if youhave been long and decide the market isworking against you, get out and standaside for awhile before going short. Ignorethis advice and you could be whipsawed losing as the market heads downward,then losing more as the market goes up.

Dont be a nickel and dimer.

If you want to be long, dont put a price order in 2 cents belowthe market, hoping to nd a bargain. Traders who try to squeeze

an extra penny out of the marketfrequently nd the market movesalmost to their target, then slipsin the opposite direction. So,although they were hoping foran extra penny, they may in actend up losing a nickel. When youthink it is time to do something,make your move withouthesitation.

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Know the price trend.

Major price trends can be identi ed with line charts, one of

the fundamental tools used by successful traders. The mistakespeculators sometimes make is trying to buy or be long whilemarkets are still in a basic downtrend, or selling

Watch for key breakouts through trend lines.

short when they are in an uptrend.Charting futures yourself or subscribingto a chart service can help avoid costlyerrors of selling into obvious uptrends orbuying into downtrends.

Some successful traders basetheir trades almost exclusively onthis rule. It works like this: Make barcharts and watch them closely. Whenprices break through a trendline for twoor three days, its usually a good trading

signal. A violation of a downtrend line is abuy signal. The reverse is also true: Whenan uptrend line is penetrated, it should beconsidered a sell signal. These trend lines alsooffer you excellent guidelines for determiningstops.

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Watch for 50% retracements of a major move.

Use the half-way rule when picking buy/sell spots.

This mean nding out over what range the market has beentrading, then buying in the lower half of that range or selling in theupper half. This rule is particularly useful in a trading market or in asituation where the market is trading within a chart channel.

Frequently youll hear

the market is in a technicalreaction. That means followinga major move in either direction,the market has a tendency toretrace the move up to 50%. Forexample, if corn went from $2 to$3 in a major move up and thenstarted to slide, look for anotherchance to buy when the price

drops to $2.50.

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Watch the magnitude of market change.

Congestion areas can mean support orresistance.

Congestion areas act as barriers that slow down price action.When a market commentator says there is good technical supportat a certain price level, chances are good he is looking at a linechart that shows an old congestion area where trading took placefor several weeks over a narrow range. Major price moves maydevelop when the market breaks out of a trading area. Usually, thelonger the market has remained in the trading area, the further theprice moves once it breaks out.

By watching the size of pricemovements, you can sometimes predictthe direction the market is headed. Whena market moves lower, but by a smalleramount each day, it may be a signal for anuptrend. When the market moves up eachday, but in smaller amount, its an earlysignal that a downtrend may be just aroundthe corner.

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Major moves frequently cl imax with a key reversal.

A key reversal of an uptrend is usually indicated when prices

make new highs on high volume, then price erosion during thesame day causes a lower close than the previous days close.

A key reversal of a downtrend is a move into lows, then a strongrecovery during the day with a close higher than the previous daysclose. A key reversal may come in the form of a two-day reversalwhen on the rst day the move establishes a new high, then closesstrong. On the second day the market may open near the high closeof the previous day, then close sharply lower.

An island reversal is formed when prices gap into new highs onone day, then gap lower the next day.

Watch for head-and shoulder formations.

When you observe a chartpattern resembling a head andshoulders, it can usually be readas a sign that the market is toppingout. Remember to be aware thathead and shoulder patterns shouldnot be trusted until the secondshoulder is formed by a rally orsideways pattern.

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Watch for M tops and W bottoms.

When the market action on a price chart indicates a large M,

the price signal is telling you to sell. When a W is formed, it issignaling a move higher.

Trade triple tops and bottoms.

Once a market has hit a peak the second or third time, that canbe read as a bearish signal. The reverse is also true at the bottom.Money-making traders are always aware of these signals and usethem as a part of their overall strategy.

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Watch volume for price clues.

When volume and price go up together, this should beconsidered a buy signal. When volume increases and prices godown, its a signal telling you to sell. However, when trade volumegoes down, regardless of price direction, its usually best to standaside, or prepare your position for a market reversal.

Open interest may be a tip-off.

If open interest continues to increase as prices rise, its a buysignalespecially if volume increases at the same time. Thereverse is also true. If open interest increases with lower prices andon good volume, it is a sell signal.

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Other Commodity Research Bureau Publications:


Charting Tools for Professional Traders

Guide to Technical Indicators - Volume 1

Guide to Technical Indicators - Volume 2

Guide to Trading

How to Spot Proftable Timing Signals

How to Use Charts to Forecast Futures Prices

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50 Futures Trading Rules

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