1. Define Your Goals
Creating actionable goals as a new futures trader will help lay the foundation for what you intend to achieve. This may seem simple – ‘I want to be profitable’ – but adding some additional specifics will provide a framework and perspective to help guide your trading.
For example, goals can be based on varying timelines:
- Per Trade – What is your profit goal and loss limit per trade?
- Trading Day – What is your profit goal and loss limit per day?
- Weekly – What is your profit goal and loss limit per week
Finding the perspective that resonates most with you can be very beneficial to help gauge and track your ongoing performance.
2. Research and Plan Your Strategy
Futures contracts are priced to predict the future value of an index or commodity. Using technical analysis, you can explore a variety of strategies to potentially benefit from both upward and downward moving contract prices. Strategies can be built based on both basic and sophisticated market movement premises.
- Ex. Basic Strategy Premise – Bullish or bearish (up or down) view on the general market trend
The chart below of the S&P 500 Index (ES) is an example of using technical analysis to form a basic strategy based on backtesting a bullish trend that had a potential buying opportunity along with a false bearish breakout:
- Ex. Sophisticated Strategy Premise – Bullish or bearish break above or below two technical indicators diverging
The chart below of the S&P 500 Index (ES) is an example of using technical analysis to backtest a sophisticated strategy with the 50 Day SMA crossing over the 100 Day SMA and a bearish break below the 100 Day SMA:
3. Use Indicators
Technical indicators can be incorporated into futures trading strategies to provide additional insight including potential buy and sell levels based on historic price action in the market.
For example, Bollinger Bands® serve as a technical indicator of overbought (wide bands) and oversold (tight bands) market conditions. When looking at Bollinger Bands® on a futures chart, a 21-day moving average (preferred period of time) is surrounded by upper and lower band, signal overbought or oversold market conditions.
The chart below of the S&P 500 Index (ES) features Bollinger Bands® and demonstrates the tightening of bands leading to significant price movement:
4. Define Your Risk Threshold
As a new trader, defining the level of risk you are comfortable with is critical component of your trading foundation. Understanding this threshold will allow you to manage both gains and losses more effectively. In addition to your risk tolerance, this definition should also include an understanding of how much capital is needed to continue trading after a loss.
Some items to keep in mind:
- What percentage of your initial investment are you comfortable losing?
- What amount are you comfortable losing in a day? Week? Month?
- How much margin is required to enter a futures position? Margin is the minimum amount of capital required by a futures broker to enter a futures position.
- How historically volatile is a futures contract? Capital in addition to the margin requirement may be needed in order to anticipate contract volatility.
Always remember that past performance in not indicative of future results. Only funds that can be lost without jeopardizing your financial security or lifestyle should be used for trading. The importance of ensuring that your trading strategy reflects your risk preferences cannot be overstated.
5. Have an Exit Strategy in Place
When considering exit strategies, be sure to account for both of the following scenarios:
- Exiting a Profitable Trade
- Exiting an Unprofitable Trade
One exit strategy that could be beneficial for both exiting profitable and unprofitable trades is a trailing stop order. A trailing stop order follows the existing price of the futures contract by the amount of capital decided on by the trader. It executes only when the contract decreases (bullish position) or increases (bearish position) by an amount less (bullish) or greater (bearish) than the futures contract’s current price.
A stop loss order is another exit strategy that could potentially be used towards both ‘locking in’ potential profit and limiting potential loss. Stop loss orders are implemented by the trader to automatically sell a long position or buy back a short position once a predetermined price threshold has been crossed.
As mentioned above, remember past performance is not indicative of future results and you should always trade within your risk tolerance levels.