All traders should have a system to guide themselves when trading futures, one that provides buy and sell signals. It can be as simple or complicated as you need. The most important factor when deciding upon a trading system is to determine if it has a positive expectation. That means, if followed, the system is expected to generate positive returns over time.
There are also many systems available for purchase, many of which are known as ‘black box’ systems. A black box system is one that provides buy and sell signals, but does not reveal the underlying algorithms which are used to create these signals. You are basically putting your full faith in the creator of this system, and assuming that the signals being provided will lead to a positive expectation.
For most traders though, development of their own trading system is part of the enjoyment of trading. It is much more satisfying to profit from your own creation, as opposed to someone else's.
Assuming then that you now have a trading system in place, and that it has a positive expectation, what does one need to watch out for.
The first major mistake traders make is to begin to deviate from their system. Most commonly, traders either decide against certain signals due to subjective bias, or they place additional trades when their system is telling them to stay out of the market. In both cases you are subjecting yourself to additional risk, without any guarantee of additional profits. Also, the performance numbers of your system become compromised, so it is no longer possible to properly use an accurate money management plan. Such a plan is normally premised on projected levels of risk and reward that have been generated by your trading system.
The other major pitfall is something that sounds almost contradictory to the one above. However, most systems are effective only in certain types of markets. There are many kinds of markets: trending markets, sideways markets, high volatility, low volatility, etc. It is rare indeed for a trading system to consistently generate profits in all market environments. What creates large profits in a trending market may generate a large number of small losses in a sideways market. It is essential then that you adapt your trading system to the market environment. Alternatively, have a number of systems developed, and utilize the appropriate one depending on the nature of the market you are trading.
If you can be well-disciplined in sticking to your system, yet flexible enough to adapt when market conditions change, then you are probably better suited to trade futures than most people who enter these markets. The reason most new traders fail is that they are ill-prepared and undisciplined in their approach to the markets.
Bryan Moffitt is the owner of Futures Research Corp. - a company that specializes in seasonal analysis of the global futures markets. Seasonal analysis can be used by any trader to put the odds of success in their favor, regardless of the trading system or methods they are currently using.