A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
5 Careless Errors That Cost Traders Big
02/09/2015 7:00 am EST
There's nothing worse than making mistakes during the order entry and trade management stages that could have been prevented. Here are five such errors that are all too common.
No one ever likes to lose money, but the veteran trader knows 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-now that is an entirely different matter and we have no one but ourselves to blame.
See related: How to Handle Losing Trades Like a Pro
After 35 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 initiating-a position, and more commonly, it occurs when the trader is short.
I call this having a stock market mentality since the normal action for securities traders is to be long a position which gets liquidated with a sell order. As a result, we too often see novice traders who are short a contract try to close themselves out with (drumroll, please) another sell order.
Futures traders, however, are short as often (or at least as easily) as 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.
Failing to Enter or Cancel a GTC (Open) Order
In the good old days, you had to call your broker to place a good-till-cancelled (GTC, or open) order. 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 online with the click of a mouse. Trade errors? You bet, created by traders receiving fills (executions) from GTC orders they had completely forgotten about. Conversely, we see "equal but opposite" errors caused when a trader believed that a GTC was in place, when in fact, there was none.
NEXT: Confusing Mini and Regular Futures Contracts|pagebreak|
Confusing Mini and Regular Futures Contracts
Do not make the mistake of confusing full-sized with mini-sized contracts. Check your order entry symbols carefully before entering your orders. There are, at present, about two dozen mini-sized contracts available for trading, alongside their full-sized counterparts.
A common error is entering an order intended for the mini-sized contract but submitting the order using the order entry symbol for the full-sized contract. And remember, if you have a position in mini silver, be sure your liquidating order is for the mini-silver contract.
Taking Your Eye off the Clock
Thanks to electronic trading platforms, most futures contracts are open almost 24 hours a day. But not necessarily for an expiring contract on the last trading day! There's nothing more frustrating than placing a liquidating order, only to receive back an e-mail message from your broker telling you your order was TLMC ("Too Late, Market Closed").
To illustrate: The closing bell for CME Group grains, Treasuries, and meats on the last trading day for the expiring contract rings at noon (central time), but CME regular-sized stock indices close at 3:15 pm (central) on the last trading day.
Fail to get out of your December (regular-sized) S&P 500 position on December 15, 2011 and you'll only be subject to one more mark-to-market-between the December 15 closing bell and the December 16 special settlement price.
Hold a position in December corn past the noon closing bell on December 14, 2011, however, and you'll be in the position of having to receive or make delivery of 5,000 bushels of #2 yellow corn!
Who's Watching the Store?
Trade options? If so, do you fully understand your brokerage firm's exercise procedures within the framework of the exchange rules?
Did you know that under the majority of exchange rules, a long option will be exercised if it is in the money by as little as one tick at the time of the option's expiration? Imagine being long a particular gold put, which, at the close of the option expiration date, had a nominal 40 cents/ounce of intrinsic value (worth $40.00 less the potential cost of commissions and fees).
Assuming there was no outright liquidation of the long put option position, it is possible that an automatic exercise would place the trader into a short gold futures position, which would potentially have unlimited risk.
So even long option traders need to know the automatic exercise rules and one's own brokerage firm's cut-off time for submitting a "do not exercise" instruction.
By Larry Schneider of Zaner Group
And speaking of options on futures, please download Options on Beans for People Who Don't Know Beans About Options.
Interested in trading gold and silver futures trading but concerned about the new, higher initial margin requirements? Have you looked into mini-sized gold and silver futures? Download our special report, Trading Mini Gold and Mini Silver Futures.
Trading futures and options is speculative in nature and involves substantial risk of loss. Trading is not suitable for all investors. You should carefully consider whether trading is appropriate for you in light of your financial resources, knowledge, and circumstances.
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