The Futures and Options Trading Plan

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Talking Charts Video

THE TRADING PLAN

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.

Price Prediction
Most traders tend to rely on some variation of fundamental or technical analysis to predict prices. Many 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 the experience of World Link Futures, genuine fool-proof techniques are very hard to come by, and our customers are advised to be very careful and skeptical of such grand claims.

Risk Management
Risk management establishes thresholds to limit loss on any individual futures position, and objectives at which to take profits. The relative size of losses and gains must be such that, over time, gains exceed losses so that trading is profitable. This, in turn, depends upon the frequency of loss relative to the frequency of gain.

Determining the exact amount of loss that should be tolerated before a futures position is closed depends upon several factors. The amount risked on any futures position depends upon the amount of margin in your account. It is often suggested that no more than 10% of total margin be risked on any one futures position. The amount risked also depends upon the volatility of the futures being traded: the greater the volatility, the more is risked since you want to be able to carry the position through transitory price movements, or "noise", and to not have to exit a position prematurely. The size of your average trading gain also determines to what level you should limit loss. You need to limit loss at a level such that, over time, losses do not exceed gains in the aggregate.

TRADING EDUCATION
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Did you know?....
One of the reasons why futures were created was so that the retail trader could participate in exciting commodities, some of which have made incredible gains, like the stock market indices, the grains, gold, oil, and even orange juice.

Others are doing it...
Some are dentists, others teachers, still others are construction workers or stay-at-home moms or dads. Some have university degrees while others, only a high-school diploma.

Why learn about commodities?...
Because the commodity markets hold tremendous opportunity for profit. But there is also significant risk of loss. Beginners must educate themselves and determine if commodity trading is suitable for them.

Offered by the Chicago Mercantile Exchange
Click here for your FREE Educational Package

Buying Options on Futures Contracts
Although futures contracts have been traded on U.S. exchanges since 1865, options on futures contracts were not introduced until 1982. Today, options on futures contracts offer a wide and diverse range of potentially attractive investment opportunities. This booklet is designed to provide you with a basic understanding of options on futures contracts - what they are, how they work and the opportunities and risks involved in trading them.

Options on Futures
With options on futures, traders can construct strategies that profit in advancing, declining or even stable markets, while at the same time reducing risk and increasing leverage. However, before you incorporate options into your trading and risk management decisions, you should thoroughly investigate the risks, nomenclature and strategic uses of these instruments. The more background you have in options, the more likely you will be able to take full advantage of these powerful financial instruments.

Futures & Options Strategy Guide
With the many futures and options strategies available to the trader, it is sometimes hard to keep track of them all. This 49-page Strategy Guide illustrates 21 trading strategies in an easy-to-analyse, graphical format. It starts with basic, simple strategies and progresses to more sophisticated option-related strategies like butterfly spreads, ratio spreads and box/conversions. It cross-references each strategy with market sentiment, whether bullish, bearish, or neutral and with volatility, whether rising or falling. For each trade, it details the break-even point, risk and potential gain at expiration as well as "things to watch" along the way. This Guide is a great reference for any trader.

Offered by the Chicago Mercantile Exchange and
the National Futures Association ~
Click here for your FREE Educational Package