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The Four Biggest Mistakes in Futures Trading


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Table of Contents

INTRODUCTION xi The Bad News, The Worse News, The Good News and The Better News xi Why So Many Fail xii What Sets Futures Trading Apart xii Attacking From The Bottom Up Versus The Top Down xiv One Word of Warning xv Topics To Be Covered xv MISTAKE #1: LACK OF A TRADING PLAN 1 What is Mistake #1 1 Why Do Traders Make Mistake #1 2 The Recipe For Trading Success (That Nobody Wants To Hear) 5 How To Avoid Mistake #1 5 The Litmus Test 6 How Much Capital Will You Commit To Futures Trading 7 What Market or Markets Will You Trade 9 What Type of Trading Time Frame Is Best For You 10 What Type of Trading Method Will You Use 14 What Criteria Will You Use To Enter a Trade 16 What Criteria Will You Use To Exit A Trade With A Profit 17 What Criteria Will You Use To Exit A Trade With A Loss 18 A Word Of Advice: Adhere to the Four Cornerstones 19 Go With The Trend 20 Cut Your Losses 21 Let Your Profits Run / Don't Let Big Winners Get Away 21 Summary 22 MISTAKE #2: USING TOO MUCH LEVERAGE 25 What is Mistake #2 25 Understanding Leverage 27 Why Do Traders Make Mistake #2 30 How To Avoid Mistake #2 31 The Role of Mechanical Trading Systems 33 Determining The Amount of Capital Required 33 Single Market Factor #1: Optimal f 34 Calculating Optimal f 36 Single Market Factor #2: Largest Overnight Gap 36 Single Market Factor #3: Maximum Drawdown 40 One Caveat to Analyzing Trading System Results 41 Arriving at a Suggested Dollar Value Per Contract 42 Arriving at an "Aggressive" Suggested Account Size 44 Arriving at a "Conservative" Suggested Account Size 45 Arriving at an "Optimum" Suggested Account Size for Your Portfolio 46 Digging a Little Deeper 47 Summary 48 MISTAKE #3: FAILURE TO CONTROL RISK 51 What is Mistake #3 51 Why Do Traders Make Mistake #3 52 How To Avoid Mistake #3 54 Risk Control Method #1: Diversification Among Different Markets 56 Risk Control Method #2: Diversification Among Trading Time Frames and Methods 59 Risk Control Method #3: Proper Account Sizing 62 Risk Control Method #4: Margin-to-Equity Ratio 63 Risk Control Method #5: Stop-Loss Orders 65 Placing a Stop-Loss Order In the Market Place 66 Using Mental Stops 68 Not Using Stop-Loss Orders At All 70 The One Important Benefit of Stop-Loss Orders 70 Summary 71 MISTAKE #4: LACK OF DISCIPLINE 73 What is Mistake #4 73 Why Do Traders Make Mistake #4 77 How To Avoid Mistake #4 78 Overcoming The IQ Obstacle 79 A Word of Advice: Don't Think, React 82 Avoid Simple Traps 83 The Cure for "Woulda, Shoulda, Coulda" 85 System Development versus System "Tinkering" 87 Asking The Right Question 90 Summary 92 THE FOUR BIGGEST MISTAKES IN FUTURES TRADING CONCLUSION 95 APPENDIX A: Mathematical Formula for Standard Deviation 99 Standard Deviations 99

About the Author

Jay Kaeppel is the Director of Research at Essex Trading Company Ltd. and an active Commodity Trading Advisor (CTA). With over 12 years of futures trading and system development experience, his expertise as a system developer has been noted by Technical Analysis of Stocks and Commodities magazine. "Formula Research," a national monthly trading system development advisory, editied by Nelson Freeburg has acknowledged Jay Kaeppel's expertise as a trading systems developer by using two of his original systems as the foundation of their own stock market and gold fund trading systems.


"Veteran trader Jay Kaeppel describes the opportunities and challenges of futures trading with easy grace and engaging wit. After exploring the risks and rewards, Kaeppel shows how the average trader can succeed in futures by embracing four key principles of trading mastery."
?Nelson Freeburg, Editor/Publisher, Formula Research newsletter

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