Developing a Futures Trading Plan
Unfortunately, many traders completely ignore this fact and attempt to trade by the seat of their pants and an ever-shifting set of rules. You know what they say about going into business without a business plan - don't do it.
Well, your futures trading activities should also be treated like a business, thus a trading plan is an absolute necessity. But, how do you create a trading plan and what should it include?
Here are the main ingredients of any good futures trading plan...
1
Determine Your Financial Goals
What are your overall financial goals? To become rich overnight (not likely), to earn $2,000 a month, to make annual returns of 50 percent? Defining a financial goal makes it a tangible thing and thus easier to obtain. This will help you focus your efforts towards a solid figure, instead of towards the vague idea of making a lot of money.
Don't focus on getting rich, focus on reaching a specific figure. Once you reach that figure, you can alter your trading plan by defining a new, better figure. But, always define a figure.
2
Available Capital and Risk Management Rules
Determine your available trading capital and risk management criteria. The amount of capital you have available for trading will determine what types of contracts you will be able to trade. The money you set aside for trading should be expendable capital and not money that you need to survive on.
You should also specify your risk management rules. If you need help here are some basic rules for managing risk.
Finally, it is a good idea to periodically withdraw funds to pay yourself from your earnings. How much and how often you withdraw these funds should be predetermined.
3
Choosing Your Markets
Which commodity classes will you trade? There are many classes of commodities that you can focus on: metals, energies, grains, financials, etc. Each class has different characteristics and is affected by different market forces.
It is best to choose one or two classes in the beginning and learn as much as you can about them. Trying to trade too many different types of commodities can be overwhelming and confusing. Pick a few and specify them in your trading plan.
4
Choosing a Trading Strategy
Will you be a day, swing, or long-term trader? Will you be doing: seasonal trading, options trading, spread trading, or maybe even e-mini trading? These should be specified from the start in your trading plan. Different strategies use different types of fundamental or technical data and employ this data in different ways.
This will allow you to be more efficient by focusing only on the specific types of analysis that your chosen strategy calls for. For example, day traders rarely use fundamental analysis, but for longer term traders fundamental analysis is much more important.
Finally, you should also decide whether you will be a discretionary trader or a system trader.
5
Trade Selection
How will you select trades? This is easier to do once you have defined your markets and strategies in the previous two steps. However, even after those criteria are defined there will still be plenty of trading opportunities to choose from. You should specify a method that will be used to find trading opportunities and spot trade setups.
This could be something like, only choosing trades with margin requirements under a certain amount, or choosing trades with a certain historical percentage of success.
You could also choose to select your trades using an innovative program like Trademiner, which can save you a great deal of time and effort. The criteria can be whatever you want it to be, but it should be thought about and specified in your trading plan.
6
Entry and Exit Methods
Determining how to enter and exit trades is critical also. Most traders find it easy to get into a trade, but become indecisive (during mid-trade) about exiting a trade. Entry and exit points can be determined by a multitude of technical indicators. Becoming familiar with the various technical indicators and determining which you will use will take some time, but it is important to specify these in your plan before you trade.
However, it is best to use several technical tools together, because in conjunction they can help confirm or reject trading possibilities. For exit points, it is common to use technical indicators in addition to monetary profit/loss values (e.g. exiting after reaching a profit objective of $500 per contract).
7
Contraindications
It's also advisable to specify certain moments and events during which you will not do any trading. These would be times when your emotions or mental state are not conducive to trading, or when market conditions make trading very risky.
Examples include: I will not trade when my life is affected by family problems, or I will not trade during major events such as market report releases or economic press conferences.
8
Keeping a Trading Journal
This is an often overlooked but important part of your plan, but keeping a trading journal is indispensable for self-analysis and improving your performance. Revisiting your trade journal often and learning from previous mistakes is great way to increase your chances for long-term success. A journal should ideally include notes and particulars about every trade you make.
For each trade there should be two sections - before the trade and after the trade. The before section should include things like profit projections, entry/exit points, reasons for making the trade, time objectives, contingency plans, etc. The after section should include the trade's actual profits/losses, overall success/failure, unforeseen circumstances that occurred, and any lessons learned about yourself or the markets.
Your futures trading plan doesn't need to be overly complex, simplicity is often preferable. Undoubtedly, when you first write your plan, there will be criteria that you don't think of. Your plan can be updated later after you begin trading and discover certain inadequacies with it. But, one thing is certain, you must formulate some sort of plan before you begin trading or you are almost guaranteed to fail.
