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Realistic Expectations
Article By Rick
Thachuk
World Link Futures
Futures traders, especially beginning traders, often open
an account with unrealistic expectations of trading performance. These expectations could
be formed by the sales literature for a trading program that emphasizes its profitability,
by reports of success stories by top traders or by some brokers within the industry. In
all cases, you are rarely made aware of the many other times when performances were
considerably worse. In other words, you are a victim of selection bias.
Selection bias is a term well known within the social
sciences and occurs whenever some undesired screening factor leads to a misrepresentation
of a population sample. For example, traders seldom express their losing trades with as
much enthusiasm as their winning trades. Consequently, a random selection of letters or
phone calls received by a company that sells a trading program often will overstate the
proportion of traders who are doing well. Sometimes the cause of the selection bias is not
obvious. For instance, let's say that a trader who purchases a very expensive price and
charting package is more profitable than another trader without it. The merits of the
package seem obvious. Maybe not. It could be that the individual who can afford to
purchase the package is better capitalized than the other trader and this is the reason
for the better performance.
Starting off your futures and options trading experience
with unrealistic expectations inevitably will lead to frustration and disappointment. It's
better to face reality now. It will make life as a trader easier down the road. Here are
just a few facts to dispel those unrealistic expectations.
1. More traders lose money than make money.
Within the industry, only a small percentage of retail traders are
profitable on a consistent basis. Moreover, if you are just starting out, you should
expect to incur some loss strictly due to error on your part as you climb up the learning
curve. Increased trading knowledge and experience combined with trading strategies that
have superior risk/return characteristics can help put the odds of success in your favor.
So, it is important to study the markets and educate yourself before trading or,
alternatively, you can rely on the support of your broker professional. Another option you
may also want to consider is paper trading. It's a viable option because it's a lot
cheaper to make a mistake in a fictitious account than a real one.
2. You will have losing trades.
In fact, most of your trades will be losing trades. It is impossible to
predict price movements every time. Even when the technical and fundamental factors are in
agreement, the market often moves in an unexpected way. This can even happen several times
in a row. For this reason, it is always important to make sure that loss is limited on
every trade and that you have sufficient trading capital to withstand several losing
trades without being taken out of the game.
3. Don't expect to become financially
independent.
It's unrealistic to expect a small-sized account, especially one under
$5,000, to generate consistent income to replace regular employment. While this may be
possible for a very low percentage of traders, it does require high-risk trading.
High-risk trading means that if you are one of the many who lost money, then you probably
lost your money very quickly and you may end up owing even more money to the clearing
firm. High-risk trading should be avoided, especially by the beginner. Rather, concentrate
on low-risk, low-frequent trading and devote appropriate effort to increasing your
knowledge and understanding of commodity investing.
Remember, as a beginner the emphasis should be on learning
and proceeding slowly. By that, I mean practicing in a paper trading account and confining
your trades to those that have low risk. The expectations of huge profit that many
beginners start out with may be realized, but only after you invest the requisite time and
energy and only after a slow and realistic start.
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