An Introduction to Developing a Futures Trading System

Author: Max Day

Author: Max Day

Futures trading is a great arena for traders that have had success with equities to graduate to when they're ready to take on a little more risk in search of more profits. But just like stocks or forex, in order to be successful in futures trading, you need to have a plan that gives you an edge and helps you keep your losses small while maximizing your winners. Yeah, that's the same old advice you're bound to hear about developing a system for trading any asset class, but it's especially true with futures, where the use of leverage can definitely magnify our winners, but also put us at risk for losing more than our initial investment. In fact, let's consider that lesson number one when it comes constructing a futures trading system from the ground up. Traders should be pragmatic and deliberate when considering futures trading. Just because you've been successful with stocks, forex or options doesn't mean you'll find the same success with futures. In other words, make sure that you're in a position to absorb the inherent risks associated with this kind of trading and make sure the volatility that is prevalent in futures is something you can financially and mentally handle. Narrow Your Focus For Successful Results One of the great things about the world of futures trading is the large variety of products that investors can trade. If you like trading indexes, you can trade futures on the Dow Jones Industrial Average, the Nasdaq and S&P 500 among other US indexes. You can even trade futures on some of the major European indexes. If bonds are your cup of tea, there are futures available on various US government-issued bonds. For forex traders, there are futures available on single currencies and if you still love stocks, you can trade single-stock equity futures. Of course we cannot forget commodity futures, which will give you access to gold, crude oil, soybeans, grains and a host of other commodities.

While we would certainly prefer to have choices when investing, all the choices in the world of futures can be dizzying and trying to trade all of these products would require more than one pair of eyes. Choose a couple of futures products to start with and focus your energies there when your system is in its nascent stages. Perhaps, as you become more experienced and your profits grow, you can add more products, but stick with just two or three to start. That narrow focus will keep you disciplined and focused on the best trades. Back-Test Your Strategies, Please You simply cannot go into futures trading blind, so testing your strategies before you start can save you a lot of heartache (and money). Make sure your back-test is comprehensive. Depending on what product you're trading, you'll want to back-test at least six months of data if not more. To get the most optimal results out of your back-test, you'll want to encompass a variety of market conditions, position sizes and stop-loss parameters.

While it may sound mundane, we cannot stress enough the importance of knowing your system's strengths and weaknesses before setting it loose on a live account. Decide On A Few Indicators... And stick with those. Keep it simple. The choices among indicators that are available to futures traders are almost as varied as the products themselves. Again, with all these choices, we want to find just a few indicators that we're comfortable with and understand well and stick with those.

Deciding on what indicators to use depends on your trading style. If you're a trend follower, it might be best to stick with moving averages and use the ADX indicator. Some traders focus on volume action and here we would watch on balance volume and the advance/decline distribution. Momentum traders would likely be comfortable with Parabolic SAR and Stochastics, whereas traders that hunt for overbought and oversold conditions would probably be most comfortable using the Relative Strength Index (RSI).

Indicators are useful and futures traders shouldn't be without them, but you should consider them to be a bountiful buffet. If you consume too much, you'll be sorry in the end. Remember Why You Have A System In The First Place Consider your system a protective measure, an insurance policy if you will, first and foremost, and a profit generator second. Your system should include strict rules to keep your losses small. Perhaps if you're a tech guru, you can automate your system to implement stop-loss orders depending on the market you're trading and size of your trade. Regardless of how you develop your system, it must include protection. Your system should keep you in the game, not run you out in the first inning. Keeping those losses small will keep you in the game for a long time. About the Author:

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