Many who trade futures successfully rely on a trading plan.
Just like a business plan outlines in detail the establishment and development of a proposed business, a trading plan outlines in detail a structure for trading. There are two major components of a trading plan: a method of price prediction which signals if and when to buy or sell a particular futures contract, and a risk management program which dictates the amount of money to risk on any trade, and specifies when to cut losses. Trading plans are fluid in the sense that they are constantly being tested and amended so as to improve overall performance and profitability. Strict observance of the rules of the trading plan is the hallmark of a successful futures trader.commodity futures broker, futures trader, commodities futures trading, financial and commodity futures markets, paper trading, full service broker assisted accounts.
Price Prediction Profit on a futures trade is earned if you buy low and sell high, or sell high and buy back low. While simple in concept, this requires you, the trader, to have some idea of where prices will be several weeks or months from now. That is, it requires some sort of price prediction methodology. Most traders tend to rely on some variation of fundamental or technical analysis to predict prices. Many traders also spend considerable time and energy attempting to identify new measurements or signals that provide the edge in predicting prices. Stories abound of traders who claim to have discovered proof-positive techniques for predicting prices, and then offer to sell the information to you for a price. In my experience, genuine fool-proof techniques are very hard to come by, and I would advise you to be very careful and skeptical of such grand claims
Welcome to Money Management For Traders By Chuck Hackett
My mission here is to lay out a working example of how money management fits into the trading plan. You don't have to follow this exact example in your trading, but I believe that even if you apply only part of it, you will greatly improve your chances of survival and of ultimately becoming a member of that magical ten percent winner's club. First, a little background.
Most traders seem to be more concerned with the latest and greatest method of getting into a market. There are more ways of giving yourself a reason to get in than you can shake a stick at: chart patterns, breakouts, indicators, fundamentals, astrological events, neural nets, boredom, and on and on. Getting in is the easiest thing to do. Of course it is important, after all if you get in at the right place you will have an easier time getting out with a profit and avoiding a loss.
It is interesting to note how much less is written about getting out than getting in, since getting out is just important as getting in. Many traders feel they have made a terrible mistake immediately after having gotten in. This reaction has given birth to a new kind of market order known among brokers as the "CIC", which stands for "cancel if close".
This order is implemented when a trader doesn't want to take a loss according to the original stop loss plan, and instead wants to risk more to see if the trade will work out. They don't trust the hours of analysis they did that told them to "get in now before you miss this beautiful trade!" The sense of having made a mistake becomes so strong that they get back out with a small loss, or hold on, blindly riding the trade through profits to a large loss.
Either way, the idea of money management is usually an afterthought. It occurs to the trader just after getting in, and it goes something like this: "OH ----, it's going against me, I hope I don't get stopped out where my stop loss is now because it would kill my account!" After about three to five of these trading "experiences", the average trader simply won't have enough left to get "in" in any market again and will often give up trading entirely.
For the broker, it's bad because he has to replace that client, and that means a lot of work. For the trader it's worse, of course, because now the money is gone and he or she didn't even have a chance to learn anything useful about trading, except that it can magically evaporate money.
It 's common knowledge over eighty percent of traders lose their money and stop trading within their first year, and that about ten percent of traders get the other traders' money, year after year. If the odds are stacked against new traders nine to one, why do they still want to start trading? Usually the answer is they think they have a better way of "getting in". The fact is new traders often do have better ways of "getting in". It's the getting out part that gets all messed up.
What is it that the ten percent of traders who seem to consistently take everyone else's money are doing differently than everyone else? Is it some super secret way of "getting in"? When these wizards are interviewed, they often say: "I let my profits ride, and cut my losses quickly." Hmmmm. No kidding. Others offer more helpful advice like "It's easy: buy low and sell high". Ok, we're all ready to trade for a living now! What are these wizards really saying between the lines that separate their results from everyone else's? The answer is simple, but ninety percent of traders don't do it, and probably wouldn't do it if they knew how.
The answer is to treat trading like a business, which specifically means having a business plan. Even more specifically it means having a trading plan that applies the concept of money management before deciding how to get into a market. For most traders, the feeling of being "in the market" is more rewarding than whether they actually win or lose. For them, a real trading plan would get in the way of what they are really trying to get out of the markets, which is a specific flavor of excitement. All they have to have is a half-decent excuse to "get in" to immediately taste the sweet tension of being in a trade.
The cycle deepens when the sense of relief felt after getting out of a losing trade becomes more powerful and satisfying than the act taking a profit. If anyone has trouble believing this, have him try reserving a hotel room in Las Vegas on short notice.
The first step is to select markets that you can afford to trade. Let's consider a how money management might be applied to a $3500 dollar account. If you consider yourself a conservative trader you could select markets to trade in using the following guidelines:
Take the current price of a contract and multiply it by its size to get the current total value of the contract. Take the total contract value and multiply it by 20%. If this amount is more than $3500, then find another contract. If this amount is less than $3500, then divide by nine. Set your stop risking this amount. Select and apply your entry method. Move your stops up behind your trade, let it run, or consider taking early profits. What have you accomplished by going through these steps?
First, you have protected yourself against becoming over leveraged. Second, you have set yourself up for nine tries in a market instead of the typical one or two. Third, you have decided where to get out if things don't work Fourth, you have taken steps towards removing yourself emotionally from the traps of fear and greed. IMPORTANT: Placing a risk reducing type order such as a "stop-loss order" which is intended to limit a loss to a certain amount may not be effective because market conditions may make it impossible to execute.
Which markets currently meet the criteria for a $3500 dollar account? Remember, this is only a suggestion regarding how to do this. You should work out your own method depending on your risk comfort level.
Note: Contract values may have changed.
Please Review the Disclaimer
Contract Current Value 20% Amount Suggested Stop Amount Kilo Gold $9550 $1910 Approx. $200.00 Chicago Silver (1000oz) $6100 $1220 Approx. $140.00 Corn (CBOT) $14250 $2850 Approx. $320.00 Oats (CBOT) $7500 $1500 Approx. $170.00 Bean Oil $16200 $3240 Approx. $360.00 Cocoa $16000 $3200 Approx. $360.00 Orange Juice $16000 $3200 Approx. $360.00 MidAm Beans $6750 $1350 Approx. $150.00 MidAm Hogs $11200 $2240 Approx. $250.00 MidAm Cattle $14000 $2800 Approx. $320.00
Disclaimer and Disclosure of Risk Statement You should understand that trading in the futures and or options markets is not for everyone. There is substantial risk of loss when trading futures and or options. Carefully evaluate whether trading in the futures and or options markets is appropriate, as such trading is speculative in nature. When trading futures, you may sustain losses which exceed your margin deposits. Purchasing options may result in the entire loss of premiums paid for such options. Options sellers should understand that they may be at risk of assuming a long futures position in the case of selling a put or a short futures position in the case of selling a call from the respective strike prices of such options. Past results are not necessarily indicative of future results.
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