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All professional traders have a trading plan. Trading futures is a zero sum game and those with a plan (and the discipline to apply it) will succeed over those that have no plan. A plan details the particular market anomaly that you intend to exploit - your edge. Human emotion creates anomalies - essentially, the fear and the greed of those that have no trading plan.
Creating a trading plan and rigidly applying that plan allows the professional trader to eliminate emotional responses from his trading.
Let's look at what your written trading plan should cover:
Trading concept - What anomaly is your trading strategy intending to exploit?
Timeframe - The shorter the timeframe the more trades that can be made. However short term trading leads to lower reward:risk ratio's and higher commission costs.
Instrument - There are many different ways to trade essentially the same idea - options, futures, exchange traded funds etc. Which offers the most reward for your trading concept?
Entry - How will you open your trade?
Exit - How will you close your trade - A stop loss should be placed at a point where the trading concept become invalid, this could be a specific price or a certain length of time. A profit exit must also be established - again either a certain target price or a timed exit.
Money Management - How much capital is required to trade the strategy and how much should be risked on each trade to maximise returns whilst minimising the risk of blowing the account?
End of Day Routine - At the end of each day every trade should be compared to the trading plan and any variances should be addressed. Remember the plan is their for a reason and you must trade it exactly. If a change is required then it should be properly tested before being added to the plan. No decisions should be made whilst a trade is live.
Brokers - Which broker will you use and how will you trade? Automating a trading plan through the broker's API will help to eliminate any emotional responses.
Your plan will require constant revision as the market dynamics change. If you have noticed a market anomaly then it's very like that many of your competitors have as well.
"If you don't know where you are going, any road will take you there." Lewis Carroll
Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders. Tim also provides a free day trading system, the results of which are updated daily on the site.
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The Basics of Forex
The Nature of the Trading Business
Momentum Trading: A Practical Day Trading Strategy to Get Profits from Hot Stocks
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Commodity Trading - Advantages and Disadvantages
Reality of Online Forex Trading
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