Futures trading is a fast-paced, exciting business that attracts confident and assertive men and women who are convinced they can make a fortune, or at least a good side income, in one of the many futures contracts on the market. Some make it; many don’t. The percentage of self-directed traders who don’t succeed is extremely high. There are a lot of reasons why many new futures traders don’t make it on their own. One can enter the markets as a self-directed trader, handling everything involved. Another route is to utilize a professional money manager.

Look at the self-directed trader. The person may have some financial background, may be a sales person, a professional such as a doctor, dentist, teacher, or a plumber. Somewhere they have heard about the futures market, even though they may never have traded any instruments. They have a little extra money and want to try futures. The self-directed trader is faced with a buzz-saw atmosphere.  From the beginning, they have to figure out which contract or contracts they want to trade. They need to learn something about the fundamentals of the commodity; say it is soybeans. What is it used for? Where is it produced? What are the contract specifications? What threats are there to its production? What government reports affect its price? Does it trade on one exchange? Or is it traded globally?

There are many other fundamentals that a trader has to keep up with, not to mention the technical analysis of the market — charting its highs, lows and other movements. A self-directed trader soon finds he or she has taken on a fulltime job.  Perhaps a better approach for someone who doesn’t know much about commodity and financial futures markets is to utilize a professional money manager or what is referred in Managed Futures as a Commodity Trading Advisor (CTA).  Professional means what it says.  Professional money managers often have a high level of education at schools like MIT or Harvard, and a math proficiency near genius. They approach the market differently. They spend their weekends building algorithm programs while others are playing with their kids in the park. This is a business to them, just as filling cavities is the business of a dentist who wants to self-direct trade.

To trade successfully, there are rules that need strict adherence, whether the player is a professional manager or a self-directed trader. The professional manager has a sound trading plan and follows it. He/she limits losses and lets profit run, and pays full-time attention to the market. The manager makes sound, pragmatic decisions and moves quickly when market signals appear.  A professional manager utilizes prudent money management and realizes that capital preservation is essential to capital appreciation. This is a key point as a self-directed trader is more aggressive and more willing to lose money to make money.  The professional manager has learned that without capital preservation, appreciation is non-existent. This is an approach that is less aggressive and has a greater probability of success over a longer period of time.

An inexperienced, self-directed trader often seeks instant gratification, changes approach, takes quick profits and allows losses to build. Such a trader often pays attention to the market sporadically and may make decisions based on rumors and hunches. There are intense emotions involved in putting one’s money to risk and the self-directed trader is more vulnerable than a professional manager. Too often a self-directed trader will cut profits short and let losses run. That emotional involvement is how the trader can get into a deep hole.  Professional money managers have rules to follow to get out of positions. There is a risk management document that has to be followed. They have written into their system a pre-determined risk management program. If they are a discretionary trader, they have written, concrete rules that say at a certain percentage they have to blow out their positions and go flat. They have different tiers of risk management to offset positions. There is a cost to having a professional money manager and each player has to determine the worth. The money will be well spent, however, if it preserves your investment money and keeps you in the game.