No one likes to lose money. Ever. But veteran traders know there are two kinds of losses. Those caused by being on the wrong side of the market (because the seasoned trader knows the market is always right ) and those caused by doing something dumb and avoidable. Taking losses is a part of trading and successful traders will employ money management to control their losing trades. We shrug off the losers and move on to the next trade. We know no one can control market forces. But losing money through our own actions – actions we can control but failed to, ….ah, that is an entirely different matter and we have no one but ourselves to blame.
After thirty-plus years in brokerage firm management, I've compiled a short list of commonly made mistakes.
Did I want to Buy or Sell?
The first mistake on my list is entering a Buy (or a Sell) ticket when the intention was to enter a Sell (or a Buy) ticket. This usually comes on liquidating, not upon initiating a position and more commonly occurs when then trader is Short. I call this having a stock market mentality; since the normal action for securities traders is to be in a Long position which gets liquidated with a Sell order. As a result, we too often see traders holding Shorts try to close themselves out with ( drum roll please ) – another Sell order. But futures traders are Short as often (or at least as easily) they are Long. So let me repeat myself. Close out a Long position with a Sell order and close out a Short position with a Buy order.
I find it helpful if the novice trader thinks of Initiating a Position and Liquidating a Position, rather than in terms of buying and selling.
Failing to enter or to cancel a GTC (Open) Order:
In the good old days, you had to call your broker to place a GTC. Then, usually once a week, you'd receive a call from your broker reminding you that the GTC was still in force. Today, we enter our GTCs with the click of a mouse. Trade errors? You bet, caused by traders receiving fills from GTC orders they had completely forgotten about, or believing that a GTC was in place, when there was none.
Can you imagine how angry you'd have been, if on March 17 (when April gold futures was trading at $920) you said, “I'll short gold on the next bounce back to $960.00” and then failed to enter a GTC sell order for $960.00? [see April 2009 COMEX Gold Futures chart, below]
Forgetting where your positions are
IBM is IBM and it doesn't matter which stock exchange executed your order. But futures contracts are not fungible. A COMEX gold position can only be offset with a liquidating order sent to the COMEX. I have seen too many traders get long COMEX gold (or silver) and then enter the liquidating sell order for NYSE Liffe US gold (or silver). The result is two positions which have to be unwound simultaneously, and even then there is considerable risk if one contract has far less liquidity (ie greater bid/offer spreads) than the other.
And on the subject, don't make the mistake of confusing full-size with mini-sized contracts. There are, at present, about a dozen mini-sized contracts available. If you are short mini-Corn or mini-Crude Oil, be sure to liquidate the mini contract. And since March 23, 2009 , there are now micro-sized currency futures to consider as well.
Taking Your Eye off the Clock
Thanks to electronic trading platforms, most futures contracts are open almost 24 hours a day. But not for an expiring contract on the last trading day! There's nothing more frustrating than placing a liquidating order, only to be told, “TLMC” (too late, market closed). To illustrate: The closing bell for CME Group grains, treasury notes and cattle on the Last Trading Day for the expiring contract, rings at Noon (Chicago). These contracts all call for physical delivery for positions held after the Last Trading Day. So if you have a position in May Corn and you sleep through the Noon closing bell on May 14 you'll be in the position of having to receive or make delivery of 5,000 bushels of #2 yellow corn!
NOTE: This is not quite such an issue when trading cash-settled contracts like e-mini stock indices. If you fail to get out of your June e-mini position on the morning of June 19 you'll only be subject to one more mark-to-market -- between the June 19 closing bell and the June 19 Special Settlement Price.
Who's Watching the Store?
Trade Options? If so, do you fully understand your brokerage firm's exercise procedures within the framework of the exchanges' rules? Here are a couple examples of what I am alerting you to.
April 2008 Gold Futures
Did you know that under the majority of futures exchange rules, a long option will be exercised if it is in-the-money by as little as 1 tick, at the time of the option's expiration? Imagine being long 1 April (2008) $950 Gold Put. At the time of the Option Expiration ( March 26, 2008 )) the underlying futures contract closed at $949.20. The trader has 80 cents of intrinsic value (worth $80.00). Assuming there was no hedge against the position, this trader would have learned that he was short April gold from $950. The next morning ( March 27, 2008 ) April gold opened at $954.20 – an immediate mark-to-market loss of $4.20/oz. ($420 per contract).
This loss could have been avoided by having offset the long put position on March 26, or by getting long April Gold, or finding out the brokerage firm's cut-off time for submitting a DO NOT EXERCISE instruction.