A futures trading plan is extremely important if you want to make money from trading the futures markets. Put simply, a futures trading plan consists of entry conditions, exit conditions and risk management features.
It is similar to a business plan that laid out how a businessman is going to make money from his business.
Entering With A Futures Trading Plan
If you do not enter into any trade in futures contracts, you cannot make any money. Similarly, you would not lose any money. However, most people have the fear that they would lose money when they entered a trade. This is because they have decided to engage the futures market based on greed.
When they heard about people who made tons of money from futures trading, they think that they need to buy or sell a futures contract that is immediately before them. Then when the contract that they have bought or sold started to turn against them, they started panicking.
The solution is to identify high probability conditions that precedes winning trades. One way is by poring over futures historical price charts and noting down the price patterns that often occur before major moves. There are many possible price patterns but you only have to pick one that you are comfortable with and look for it in the price charts.
If it is does not happen often enough, mark it as invalid and move on to the next. Price pattern can be identifying a temporary low, by a lowest low, with 2 higher low surrounding it, or a highest high, with 2 lower high surrounding it.
Once the entry conditions have been fulfilled, you can formulate your entry point, such as entering on the next day at the open, when the open is lower or higher than the previous day. Although there are many possible entry points, there is always a resulting position being taken.
Futures Trading Plan Risk Management
Even though you have validated your entry conditions with the futures historical price charts, there is no such thing as a perfect entry with profits every time. Depending on the entry conditions that you have used, there are bound to be price reversal, where you would see the futures markets going against your position.
This is where the risk management component of the futures trading plan comes into play and it determines the amount of price reversal that would invalidate your entry or reduces the probability of your existing position making any money in the futures. Of course, the wise thing is to get out. On any futures trading platforms, you will use a stop order.
For example, if you bought a Gold futures contract at $1,800, with the expectation that it would go up, you could set a sell stop order at $1,750 to get yourself out of the long position to prevent further losses to your futures trading account.
When the price of Gold dropped to $1,750, the sell stop order would be triggered and would get you out somewhere around $1,750, depending on whether there is anyone that is willing to buy from you.
Some traders would try to have no stop loss, because they believe fundamental factors would cause the position to turn into profits again. One point to note is that futures trading involves leverage, and the more losing positions that you have in your account, it actually limits the number of new positions that you can take up.
Who knows, there might be a larger move in the stock index futures contracts, and because you are holding on to a losing position in Gold futures, you have chosen not to place a trade in the stock index futures.
Exiting A Futures Trading Plan
This is the portion of the futures trading plan that deals with profits taking. Do you exit any positions when you see profits immediately or when you are happy with the profits made?
People without a futures trading plan usually hold on to their winning positions until they turned against them or they took their profits too fast and complained later that they have left too much money on the table, and became unhappy afterwards.
Again, you should go over the futures historical price charts and identify price patterns that can help you to capture maximum profits. When you have found something that you can use to exit your positions, your futures trading plan will be complete.