Strict observance of the rules of the
trading plan is the hallmark of a successful futures trader.
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.
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.
The answer is simple, but ninety percent of traders don't do it,
and probably wouldn't do it if they knew how.
You have taken steps towards removing yourself emotionally from the traps of fear
and greed.
The Trading Plan
Do the math, see
what other markets
you could trade.
|
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.
Money Management For Traders
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
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:
1. Take the current price of a contract and multiply it by its size to get the
current total value of the contract.
2. Take the total contract value and multiply it by 20%.
3. If this amount is more than $3500, find another contract.
4. If this amount is less than $3500, divide by nine.
5. Set your stop risking this amount.
6. Select and apply your entry method.
7. 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.
|
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
|
|
|
