12 Principles for Successful Futures Trading E-Book

Niclas Hummel

• Herausgeber: Books on Demand
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2023

Seitenzahl: 138

Beschreibung

Do you want to navigate the financial markets successfully and profit from futures trading - one of the most profitable wealth-building opportunities? Have you brought enough courage, perseverance, and thirst for knowledge with you? - Then, this book is exactly right for you! In this book, Futures Trader Niclas Hummel summarizes all the principles for successful trading with futures contracts that he has discovered over his 11 years of experience. It explains how you too can successfully manage risks. The author adopts a step-by-step approach towards all important topics such as broker and market selection, entry signals, and trade management examples. Other important considerations include: statistics, expectations, and managing mental resources. "I want trading to serve you and offer a greater risk-reward for your time. Because trading doesn't always mean being active, rather letting the market work for you." This book is suitable for aspiring and interested derivative traders, and I cover the following products: - CME, NYMEX, CBOT, EUREX Futures - Mini-Futures, Micro-Futures and Options - Crypto markets: Crypto Perpetual Futures, Decentralized Crypto Derivatives A good trader has an overview of different asset classes: - Stock indices / Stocks - Commodities - Currencies / Forex / Crypto - Bonds How you can profit from the overall market and master the skill of high quality selection of markets and trends has been best described with the principles in this book. Most traders start out with a negative expectancy value. It is inherent in human nature, that betting on prices with risk and rewards doesn't come natural to us. Each individual principle increases the trader's expectancy value because a new mindset towards opportunities and risks, as well as practical techniques, is taught - until your expectancy value as a trader gets positive and the compounding effect, which is unique to short term futures trading, can take effect. In futures trading, psychology, technique, product selection, brokers, taxes, and precise methodology are important. All of these topics are explained in detail in this concise book format, so that the reader ultimately gains a comprehensive view of the financial markets and can make clear decisions in the world of trading. The methodology is further illustrated with example charts and other related graphs.

Leseprobe

Risk Disclaimer

Trading financial instruments such as futures, stocks, options, certificates, currencies, cryptocurrencies, and other investments involves substantial risks and may not be suitable for everyone. The trading strategies and techniques described in this book may not be suitable for every individual or situation. Past results do not guarantee future profits.

It is important to emphasize that trading in financial markets can potentially lead to losses, and you should only trade with capital you are willing to lose. You should be aware of all risks and seek independent financial advice before implementing the strategies described in the book.

The author and the publisher of this book do not assume any responsibility for any financial losses or other damages that may arise from trading or applying the information presented in the book. Each reader is responsible for their own trading decisions and should carefully consider their financial situation, risk tolerance, and investment objectives.

The content of this book is solely for educational purposes and does not constitute investment advice. It is your own responsibility to seek professional advice and carefully assess the risks before making trading decisions.

Please be aware that financial markets can be volatile, and market conditions can change rapidly. Always trade responsibly and with caution.

Before you commence trading, you should familiarize yourself with the applicable laws and regulations in your country and ensure that you possess all necessary licenses and permits.

"It took me five years to learn to play the game intelligently enough to make big money when I was right."

Jesse Livermore (1877-1940), Stock Trader and Speculator

Table of Contents

12 Principles for Successful Futures Trading

Risk Disclaimer

Foreword

Risk

Dealing with Losses

Starting Point - The Casino Situation

The Expectancy Value

Compound Interest Effect

Principle I: Everything is Permitted

The Selection is Crucial

Crypto

Options

Laws and Taxes

Futures Risk Calculation

Individual Stocks

Multiple Broker

Overnight Holding

Mental Capital

Decision Making in Uncertainty

Principle II: One Trade at a Time

The Overall Market

Market Participants

Obvious Correlations

Extreme Events

Serial Correlation

Risk Aggregation

Pyramiding

Positions in Different Markets

Principle III: High Risk-Reward

Risk Simulation

Return and Drawdown Statistics

Scalping

Principle IV: Wide Stop-Loss Distance and No Intraday Charts

The Stop-Loss Distance

Principle V: Follow the Trend

Point Counting

Important Levels in The Trend

Incoming and Outgoing Volumes

Trend Quality of a Trend and Counter-Trends

Candle-Trend

Non-time-based Charts

Correction Reversal

Point-2 Breakout

Continuation Candles

Reversal Patterns

Counter-Trending Candle Trends

Moving Averages

Correction Depth

Self-similar Trends

Passive Entries

The Relative Support/Resistance

The Rough Entry

Having a Variety of Signals is Better

Two Attempts

Principle VI: Be where the Volume is

News

Market Holidays

Decisions Before a News Release

Session Volume

High Volume Markets

Volume Confirms Price

Volume Zones

Principle VII: Follow Through Until the Exit Condition

Trailing

Risk Halving

Timed Close

Exit Conditions

Profit Poker

Targets

Early Closure

Principle VIII: Letting Profits Run

Timed Exits

Principle IX: Trade with your own Money

Managing External Capital

Paper Trading

Proprietary Firms

Principle X: Be Rational

Overtrading

Revenge Trading

Hope Trading

Nonsense Trading

Dealing with Frustration

Happy Life as Foundation

Futures Trading alongside a Regular Job

Meditation

Checklists

The First Trade

Principle XI: Reduce Your Risk When Things Aren't Going Well

Kelly-Criterion & Collateral

Starting with a small account

Risk Reduction

Daily Loss Limit

Principle XII: Doing Nothing Is an Important Action

Candle Pricing

Trade Management Examples

Conclusion

Keyword Table of Principles

Acknowledgment

Contact

Sources

Foreword

During my economics studies at the age of 20, I started trading in the currency market to pass the time during what I found to be dull lectures. Financial market trading immediately felt more real to me than any theory about price elasticity or the like. I was always someone who wanted to dive right in - of course, with real money. I delivered furniture to replenish my first accounts after often losing them within just 3 months.

However, that didn't deter me, and I kept starting anew, continuously fascinated by the possibilities of the market. When things didn't go well, I often cranked up the leverage to its maximum to offset losses. Needless to say, that wasn't a recipe for success - it was more like emotional gambling.

I eventually realized this, and I attempted to address the issue by acquiring knowledge. I read countless books on futures trading, chart patterns, trading psychology, and the like. This methodical studying did sharpen my understanding of the market and my considerations about different trading methods, but it didn't make me particularly profitable yet.

There were positive moments along the way, but even after 5 years, my yearly results were still not profitable. Futures trading had become a frustrating loss-making endeavor. The disparity between knowledge and results was incomprehensible to me back then. At one point, I grew utterly fed up and completely turned my back on the markets for a year. During that time, I focused on my work as a software developer, which was genuinely refreshing. Yet, the market was always the thread running through my life, and so I withdrew a small part of a larger crypto investment and resumed futures trading.

Since I didn't have the time to spend all day watching prices, I transitioned from being a day trader to someone who also holds positions at times for multiple days - a blend of day and swing trader.

From €1,000, I quickly climbed to €3,000 and beyond into the tens of thousands. The year started off positively, and the subsequent years followed suit. I finally managed to bridge the gap between knowledge and results. Slowly, I also understood why.

During a vacation in Greece, I wrote down my trading principles, which reflect my insights over 11 years, in a small notebook. I know precisely that these 12 principles are what have enabled me to achieve three consecutive years of positive results in trading. They serve as the foundation for this book.

But why are they principles rather than rules? The answer to that will become clear after the first principle. Before delving into the first principle, there are still important subjects to address regarding risk and losses, expectancy value, and the compounding effect - the fundamental variables of trading.

Risk

Taking risks is nothing more than using money in everyday life for specific purposes, because spending money is always connected to goals and expectations.

A completely normal goal is to receive value in return for the price paid. There might be obstacles, uncertainties, and setbacks involved in a regular purchase, as negotiations, delivery, or other factors might stand between the purchase and receiving the goods. However, typically you receive your purchased product without major hurdles or uncertainties.

At the financial market, things are a bit different: Taking risks - such as buying futures contracts, for instance - means stepping out of your comfort zone by default. You have to anticipate setbacks. Additionally, you accept a non-immediate reward, much like waiting for a delivery. Yet, this reward only arrives at an uncertain time in the future. Moreover, the reward doesn't come from a single purchase. The result of your purchase only becomes visible at the end of the year, after hundreds of purchases and rewards. In between, there are also losses and periods of decline.

Delayed gratification is a psychological concept that refers to a person's ability to postpone immediate satisfaction of a desire or reward in order to achieve a larger reward or a bigger goal later. This concept was first explored in the 1960s through the famous Marshmallow Experiment conducted by Walter Mischel and his colleagues.

The Marshmallow Experiment was a psychological test in which children were offered a marshmallow with the option to either eat it immediately or wait for 20 minutes to receive a second marshmallow. Researchers found that children who were able to resist the temptation of immediate indulgence and wait for the larger reward often achieved better social, academic, and professional outcomes in later stages of life.

In trading, it's not just about 20 minutes as in the experiment; it extends over an entire year. Therefore, it becomes very important to accept risk and the accompanying temporary losses as a constant variable. Ideally, you were disciplined enough as a child to wait for a bigger reward - if not, trading can be an excellent way to learn delayed gratification.

Your approach to risks always consists of two levels: the level of your ratio and the level of your psychological perception. As a trader, you need to work on both levels. The principles provide you with the right cues to manage this work

Dealing with Losses

Humans have a general tendency to weigh losses more heavily than gains of the same amount. A broken phone that incurs repair costs of €100 is perceived as very frustrating, whereas a profit of €100 earned through daily work doesn't bring the same level of joy. This strong aversion to losses is deeply ingrained in us and, in trading, it specifically leads to a risk-reward dynamic that works against you. To avoid the frustration of losses, losing positions are held longer - they grow in size - and gains are often realized too quickly.

"72% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider."

According to customer statistics from Forex brokers, more than 70% of traders overall lose more than they win. CFD brokers are legally required to provide this statistic. Other published statistics from Forex brokers show that a typical losing trader wins 60% of their trades, but the winning trades are, on average, only half as large as the losing trades. This confirms the aversion to losses. In essence, the typical losing trader goes against all 12 principles of successful futures trading. They undermine themselves. These traders may have a lot of knowledge and be skilled in chart analysis, but the problem lies in the psychological nature of decision-making and reaction patterns, not in their knowledge of the financial markets.

Interestingly, this statistic probably won't discourage you; it might even empower you: "I'm not part of that 70%." However, the truth is that it takes a lot to ensure that you truly don't become a part of that statistic.

Handling losses, as a normal interim outcome in trading, whether after a single trade, at the end of the day, or month, is crucial. Losses always hurt. The challenge is not to take losses personally and not to spiral into negative thoughts when they occur.

The determination to win the year should not be shattered by the interim result of a short-term time frame like a week for an experienced trader. Accepting this is an important step towards success. I'd like to show you a statistical perspective to help you manage these individual interim results in trading better. Additionally, I'd like to demonstrate what a realistic expectation might look like.

Starting Point - The Casino Situation

When opening and closing a trading position (roundturn), costs are incurred. Part of these costs consists of commissions, which accounts for about 5% of the total expenses. Additionally, there are exchange, clearing, brokerage, and NFA fees associated with futures trading, which make up an additional 3-4% of the costs.

Loss Distribution After 3 Months of Trading CME and EUREX Futures

This means that a speculator in the market - just like in a casino betting on black and red - would already have the odds against them with a 50-50% chance. In other words, the expectancy value would be negative in a coin toss scenario with equal payout amounts in the event of a win or loss. If loss realizations also incur fees, the capital invested would definitely be less than the initial amount after 1,000 round trips with equal loss and profit amounts.

A trading strategy must always be chosen to include the costs. The choice of the broker and the products also matter. Futures, micro-futures, knockouts, options, CFDs1, etc. - Depending on the legal basis and your account balance, you need to select the right products for your trading.

As a trader, you must gradually work your way out of this "casino-lose-situation" by using the market to your advantage and making yourself rich, not just the broker. For this, trading with quality is important. Undoubtedly, this endeavor is no easy task, but it's a feasible challenge that can be tackled through behavior guided by principles and knowledge about different financial products.

1 Contract for Difference

The Expectancy Value

"Should I take on the risk of a €200 loss, which is equivalent to working for 2 days in a job, and potentially hold €400 in my hand to spend two nights in a luxury hotel next weekend?"

These are the thoughts that go through my mind - sometimes. Of course, it doesn't make sense to think about what the unrealized money could buy you during a trade. It's just an example. In reality, I prefer to even turn off the direct PnL (Profit and Loss) display in my trading platform because I need to focus on the moment and not paint the future during it.

Putting potential positive scenarios in relation to negative consequences is part of the formula for a positive expectancy value.

What if I now say, "Should I take on the 200€ loss risk with a 40% probability to realize the weekend trip?" Knowing that I am correct less than 50% of the time is already good, because now I know that I may not necessarily get what I want. At least not with a single bet.

The formula for the expectancy value of a discrete random variable X with possible values x1, x2,..., xn and their associated probabilities is this:

This formula might look complicated, but it simply states the value that can be expected when the random variable X is repeated infinitely. It's an average prediction based on given probabilities.

The probabilities naturally vary from situation to situation, but here I'm starting by considering an average of all possible opportunities within a year. A positive expectancy value is, for example, present when you can expect to win double with a 40% probability over theoretically infinite trades.

So, you can expect a profit of 40€ per trade. To realize the weekend trip, I need to execute 10 round trips aka trades.

In contrast, the expected outcome of a typical losing trader would be exactly the opposite.

With each additional percent probability of winning and with each average € more in profit compared to loss, you, as a trader, achieve a more positive expectancy value and, therefore, profitability. Improving this statistic is the main task when you're learning to trade. By applying each principle in this book, the expected value goes up a bit, and in total, it makes a significant difference.

Compound Interest Effect

It has always left me dissatisfied to hear that with ETFs and stock savings plans, I would only make about 3-7% per year, with an inflation rate of 2-6%. The truth, in my opinion, is that it's completely senseless to aim for small, secure percentages with limited funds.

Even with a small starting capital, you can propel your profits through the compounding effect of futures trading to unexpected heights within just 1-2 years. Therefore, my viewpoint is this: Invest €1,000 and start building your wealth through futures trading with a risk of €50 per trade