How to Plan Trading Objectives in Futures Trading
Developing a trading plan does not guarantee a successful trade, but it can shift the odds in your favor. A trading plan lets you consider how you want to handle the risks inherent with futures trading and determine an exit strategy should the market move against you. Taking the time to plan your futures trading objectives gives you a considerable edge over those whose idea of a trading plan is crossing their fingers and hoping for a profit.
Go to your trading account and review the list of commodities available to trade. If you do not have a trading account, go to the CME Group website and review the list there. Conduct fundamental analysis on the commodity to determine if you should take a bullish or bearish trade stance. For example, if you are trading an agricultural commodity, go to the U.S. Department of Agriculture website and read the latest crop forecast. If you want to trade crude oil, use the U.S. Energy Information Administration website for the latest updates on crude oil supply and demand.Step 2
Use technical analysis to confirm the commodity’s bullish or bearish outlook. Pull up the commodity’s price chart and add indicators and technical analysis tools, such as Bollinger bands, to determine the trend’s direction. Analyze the chart for price patterns that may confirm or refute a trend. Look for established support and resistance levels. For example, if the commodity repeatedly drops to the same price, or support, level before bouncing back up, you may want to consider opening your trade when the price returns to that support level.Step 3
Use your fundamental and technical analysis results to determine your target entry and exit points. Take advantage of the commodity future’s leverage by constructing the trade with a minimum 3-to-1 reward-to-risk ratio. You can use your account settings to apply automatic trailing stop loss limits to your trade. This way, the stop loss will automatically rise in step with your profit so the trade will automatically close to preserve your profit if the market unexpectedly moves against you. The stop loss also protects your trading capital by automatically closing out a small loss before it develops into a large one.
- Wait for the commodity to reach your predetermined entry price before opening a position. Don’t chase a trade.
- Don’t abandon your plan in the heat of trading. If the market hands you a profit, close out the trade and take it. Likewise, don’t hang onto a losing trade hoping it will turn around. Cut your loss and get out.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.