Many people approach the futures markets much as they would a casino. They trade based on hunches, they do not have a plan, and because of that they get caught up in the excitement of the markets. This causes them to lose sight of what should be their primary objective - making a profit. This is probably a big reason why the majority of new futures traders end up losing money.
Before becoming a futures trader one should first fully familiarize themselves with the markets they are planning to trade. Study them so that you understand the underlying fundamentals of the market, as well as how they trade.
Once you are comfortable with a market, the most important task to be completed is to develop your trading plan. Without a trading plan in place, you are likely to end up as one of the 90% of new traders who fail to succeed. It is always a good idea to “paper trade" a new plan. This allows you to make a better determination of the viability of your plan without having to risk any capital. Many brokers provide “paper trading" platforms which clients can use to test their trading systems.
It doesn't matter if you are a day trader or a position trader, but develop a plan accordingly and stick to it. A solid trading plan should include all of the following:
1) Trade Entry Criteria - a good plan should provide reliable signals for putting a trade on. A successful plan should also have a positive expectation ( your trades should result in an increasing equity curve over time - ie. On average be profitable). Back testing your criteria is a valuable exercise, but be careful not to over-optimize your system to accommodate only historical prices. Back-tested systems that have been over optimized tend not to do so well with real-time prices.
2) Trade Exit Criteria - before entering a trade, you should already know where you will be exiting the trade. This consists of a stop loss figure, to minimize losses, and a profit target. There are variations on this, but those two elements should in some form be part of every trading plan. Variations include exits based on a specific timeframe as opposed to or in addition to a price movement threshold. There are also plans where a trader sells half of his position at a certain profit target and lets the balance of his trade run, in the hopes of extended profits. Bottom line however is that too many traders make bad decisions by becoming emotionally attached to a trade, and this is generally a result of not having your exit strategy already identified ahead of time.
3) Money Management - while stop losses are a prudent form of risk management, an even more important element of a trading plan is money management. What money management tells you is how much to risk on each trade - ie. How big a position to take on each trade. A good money management plan will allow you to increase the size of your trades as your account equity goes up, and scale back the size of your trades if equity falls due to losing trades. Money management is vitally important, and is a complex topic unto itself.
If a trader has all of the above in place prior to starting to trade, he/she stands a far better chance of being successful.
It is important to stick to your plan. If it turns out to be unprofitable, make whatever changes you feel are necessary, and then stick to the new plan.
Finally, make sure you track your trading progress. Keep a trading journal in the form of a spreadsheet. This allows you to analyze your trading to see what is successful and what is not.
Trade with a plan, and plan to be successful.
Bryan Moffitt is the owner of Futures Research Corp. - a company that provides traders with valuable analysis and research to improve their trading success in the futures markets. To learn more about futures trading, sign up for a free 1 hour introductory webinar at http://www.futuresresearchcorp.com/Webinar.aspx