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Futures Trading Plan - Planning For Success

Any great endeavor starts with a great plan. What would the Eiffel Tower look like if there were no plans? Or if the builder of your new house want to just “figure it out as I go” would you allow him to build? Great successes are born from great planning and this is true in the futures market when your trading rules create a successful futures trading plan.

What is a Futures Trading Plan?
A futures trading plan is similar to a stock trading plan; both represent your set of “terms and conditions” for making trades. By establishing your futures trading plan before you enter the market, you can establish rules void of the emotions that will grab you in the heat of the moment. Why is this important? Whether things are going well or poorly, there is a tendency for people to react emotionally. Emotions are a great thing normally, but a poor guide when you are making major money decisions with your investments. Some things you might want to include in your futures trading plan are:

  • A Beginning Amount to Start – This is important not only from an investment prospective but from a personal one as well. It is important to understand that there is a direct relationship between the amount of capital invested and the probability of successful trading. Professional recommend starting your investing with a minimum of $10,000; starting with less may leave you vulnerable to greater risk since you can’t apply proper risk management principles. Starting with less than this will put you at a disadvantage but you can overcome it with a conservative approach. Remember the story of Richard Dennis; he isn’t the typical investor but he built a $200 million fortune from just $1,600.

  • Counting the Cost – Your initial investment shouldn’t only be considered the amount you are willing to invest but the amount you are able to lose. This is the reason it is called “risk capital”. Risk capital is defined as money you can afford to lose without affecting your standard of living. It should also be money that you feel comfortable risking. Think of your commodity account as an investment in a business. Many businesses fail; that's life. If you aren’t afraid of losing your money you are more likely to make correct trading decisions.

  • Being in the Trenches – Every investor needs to map out a strategy in their futures trading plan for the actual buying and selling decisions. Some people are very disciplined and able to remember the general principles of defensive investing while others need a plan for every scenario possible. Be honest with yourself and evaluate your tendencies. This is not some indictment on your character; this is your only opportunity to protect you investment, so be thorough and honest.

  • Stop Loss Plans – No one wants to think about what they if they lose; everyone wants to win every time but in a futures trading plan. This becomes part of a stop loss strategy. There are defensive techniques for not only recognizing when to get out of a buy but also how you should do it. Without solid charting and analysis, it is impossible to determine whether a downtrend is temporary or devastating.

  • Technical analysis This is the backbone of any futures trading plan. Through charting and research, an investor has the best view of which direction a commodity is heading and why. Committing to a trading system like Japanese Candlesticks is invaluable to accomplishing your technical analysis due to its powerful charting principles.

Principles to Live By
There are four central precepts for every futures trading plan; these principles should be written at the top of your futures trading plan and posted next to your computer. These principles are:

  1. Trade with the trend
  2. Cut losses short
  3. Let profits run
  4. Manage risk

These rules outline everything that is important in a futures trading plan and everything else that you include must recognize these for principles. By establishing your futures trading plan you are able to learn the ideas of successful and profitable investing in the futures markets.

 

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