If trading is a game of cat and mice, with the trader being the cat and the money being the mice, then you really need to develop a futures trading strategy that is based on game theory.
Never Heard Of Game Theory
Game theory is such an intimidating phrase. It is the research of the decision making processes, in various situations, resulting in the best outcome for the participant.
Formally, the participant is called the player and the situation he is in, is called the game. All these happens in a theoretical setting, and there will be very specific measurement of a player’s payoff, which is derived from the strategy adopted by the player.
Simplest Game: Tit-Tac-Toe
In the game of tit-tac-toe, the players put ‘X’ or ‘O’ in each turn, until either of them got 3 ‘X’ or ‘O’ in a row first. For an experienced player, he will consider where his opponent has marked and where his opponent’s next 2 moves would be, when making a new move.
Supposed that both players need to pay an entrance fee of $100 each to play this tit-tac-toe game, then there is $200 on the table. Whoever wins would take all the money. If one of them lose, he would lose $100. If he wins, he would get $200, or doubled what he actually puts in.
For a consistent player of more than 50% winning rate and who understands the tit-tac-toe game pretty well, he would be on his way to consistent profits, taking money from the clueless player.
Simplest Futures Trading Strategy
In futures trading, there are always 2 decisions that can be made, to buy or to sell futures contracts. If we apply the tit-tac-toe example to futures trading, marking a ‘X’ is a buy and marking a ‘O’ is a sell decision. We further simplified the players into 2 groups, buy-only or sell-only.
The buy-only group would only be able to execute buy transactions, and vice versa. Either group of traders would be fighting at any time to place as many positions as possible to form a trend that other traders would follow. This is similar to getting 3 ‘X’ or ‘O’ in a row. We can use this game theory idea to develop a possible futures trading strategy.
Price Charts In Future Trading Platform
On a short time frame, check any futures price chart on any future trading platform. Look for areas of sideways movements where there are traders playing tit-tac-toe, with each group trying to outdo the other. Switch to a longer time frame chart. Check for possible breakouts from the consolidating area. If there is one, you can be sure that following the direction of the breakout is the right way to go.
Future Paper Trading To Develop Confidence
After you have read about or know about a new trading method, you should always perform future paper trading to develop confidence in the new futures trading strategy.