Playing Your Hand Wisely: Navigating Futures Trading With Precision And Planning
Chicago, IL
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July 25, 2024 08:35 AM Eastern Daylight Time
By Gerelyn Terzo, Benzinga
As an online trader, you’re no stranger to playing on probabilities. However, for some, all logic can often disappear when it comes to strategy. For example, you wouldn’t want to enter a high-stakes poker game with a $200 minimum buy-in with only $200 in your pocket; still, some do it. By doing this, you are effectively leaving your fate to chance like a coin flip, and chances are good that after the first hand, you’ll be folding and sacrificing future opportunities early.
When trading futures, you wouldn’t want to enter the market without a well-conceived trading plan in place. Formulating a trading plan requires patience and diligence and is essential to success. Otherwise, you could be out of luck and money before you know it.
If you’re looking to further inform yourself and improve your trading plans, EdgeClear is an independent futures broker with a wealth of resources for online traders to begin strategizing today. Below, we share some insights from the firm’s educational materials.
Steps To Building A Trading Plan
A key to building a successful online trading plan is developing your own plan beyond copy trading. If you simply adopt someone else’s strategy without any original research, you could set yourself up for failure by adhering to their risk/reward profile instead of your own. Therefore, the first step to building a trading plan is understanding that your plan should be unique, reflecting your personal goals, style and risk tolerance.
Think of your trading plan as your blueprint for investing in the markets. It’s important to refer to your trading blueprint continually to navigate the markets. Your trading plan should remind you daily to stay disciplined, neither veering from your predetermined risk management tactics nor letting your emotions influence your decisions. Remaining consistent and objective is important.
At the same time, once you’ve built your trading plan, it’s vital to remain flexible. No matter how comprehensive your blueprint is, it shouldn’t necessarily be set in stone. Instead, it will need to be updated occasionally as you grow as a trader and market conditions pivot. For example, during the COVID era, assets that were normally uncorrelated — like gold and equities — began trading in lockstep with one another. Traders who refused to adapt and make changes would soon realize they were outplayed.
Below are four questions that EdgeClear believes every trader should ask themselves when formulating a trading plan.
What is your timeframe?
First and foremost, you need to ask yourself how long you will test a plan before deciding whether to fully commit to it or abandon ship. Setting a timeframe will give you a point of reference, ensuring that you’re sufficiently prepared with funding and risk management along the way. Allow yourself a specified period to either improve your results or scuttle the plan.
Which performance benchmarks are you targeting?
It’s also necessary to identify performance metrics, including goals that will continue to challenge you but that are not so lofty that they are unattainable. Without milestones, you wouldn’t know when to celebrate or step it up. As a trader, you can use these benchmarks to keep you motivated and accountable and to wake up the next day and do it all over again even in the face of challenges. For example, you could strive for consistency by trading at least a couple of contracts with a positive risk/reward ratio. Another idea highlighted by EdgeClear is to target a 10% monthly return that you can then scale higher over time.
How do you plan to gauge your performance?
When you’re assessing your performance as a futures trader, you might be tempted to compare yourself with another trader. More often than not, nothing good comes from that, as the other trader is bringing a different set of skills, a different risk/reward profile and different resources to the fray.
Instead, try measuring your performance against your own set of standards while consistently evaluating your results for improvements in areas like profits and losses, understanding that change might not happen overnight. As you adjust your risk/reward profile, target more successful trades — all the while acknowledging your comfort level and level of stress.
How can you scale up the amount you’re trading?
Once you start to experience success with your trading plan, it’s normal to consider scaling up to bolster your profits. Before you do, make sure you’re ready because while placing bigger bets could lead to greater rewards, it could also amplify losses.
EdgeClear recommends considering practical factors like your personal resources while evaluating your past performance against your goals. Even if you are equipped to raise the stakes, make sure that the trade is worthy of a bigger commitment. Measure features like an asset’s liquidity to ensure you don’t unintentionally penalize yourself with things like slippage.
Funding And Margin Are Key
The CME has a minimum threshold for trading futures contracts. Keep in mind that futures contracts are inherently leveraged. Your broker might provide some day margin, allowing you to enter into a position with lower funds. Treat the day margin as greater buying power, like receiving additional chips at the poker table. However, EdgeClear warns that this margin could also translate into greater losses.
If you are day trading with margins less than the required initial margin, positions may not be carried overnight. It's crucial to understand this limitation to avoid unexpected position liquidations.
When it comes to funding your account, limit it to the amount of capital you can afford to lose. Avoid using capital that you need for your basic daily needs to fund your account. Otherwise, you are also more likely to increase your stress level. It’s better to reduce your position than trading with volatile emotions.
Next, target funding your available risk capital with 100% of the initial margin for each contract you’re trading. For example, let’s say your trading strategy involves up to three E-mini S&P 500 futures, which carry an initial margin of $12,980 per contract (as of 6/17/2024). In this scenario, EdgeClear suggests funding with roughly $40,000, or at least half of that amount, if planning to exclusively day trade. Otherwise, consider downsizing to trading micro contracts.
Risk Management And Accountability Go Hand In Hand
Risk management is a critical part of any trader’s strategy, whether it’s someone at a trading firm or a retail trader. But in order to have proper risk management, a trader first must establish a partnership with a trusted party like EdgeClear to ensure greater accountability. This partner must be in the loop on your trading plan so that they can provide the support you need to stay on track every day.
No matter how hard you work to perfect your trading plan, it’s important to put it to the test every day. Without accountability, it’s simple to become complacent or rest on your laurels, causing you to lose your hard-earned edge. The EdgeClear team boasts several decades of brokerage industry experience and recognizes the importance of providing support to online traders when they have questions — or are looking to take their trading game to the next level.
Featured photo by Michał Parzuchowski on Unsplash.
A forward-thinking futures broker. Led by industry experts who understand the complexities of trading, Edge Clear combines the best of technology, service and risk control.
This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice. Derivatives trading involves a substantial risk of loss and is not suitable for all investors.
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