There is no single best futures trading strategy, and it’s recommended to implement multiple strategies simultaneously. Traders should consider their capital, available time, and personality when choosing a strategy. Backtesting is important for mechanical systems, while discretionary traders should focus on practice. The trader’s advantage and potential losses should be evaluated using mathematical expectation. Trading capital is expensive, and it’s important to choose a strategy that fits one’s personality and capital.
There are many successful futures trading strategies. Of these, no strategy is demonstrably the best. There are also solid mathematical reasons for preferring to have several futures trading strategies implemented simultaneously. Even if a trader’s bankroll isn’t large enough to trade 12 to 20 different futures using two or three systems on each, he may find that different classes of futures need different futures trading strategies.
The first two things a trader needs to consider are trading capital and available time. If the trader has a small stake, such as $25,000, late-day success could be problematic. Using a mechanical system could further reduce his odds. If the trader has enough cash to support his family for a year while he trades, day trading on $25,000 could work.
The trader must consider his own personality. If he needs to know how trading decisions are made, a standard system probably won’t work for him. Typically, they are so-called “black box” systems, which means that the decision algorithms are not disclosed. If you have problems with attention or decision making, a pattern recognition approach combined with judgment – a discretionary system – is probably not suitable when combined with day trading.
If a trader’s preference for futures trading strategies is for a mechanical system, the first thing he needs to do is employ backtesting strategies to be sure that the system is profitable. A discretionary trader must hire someone to train him or him to train himself. While backtesting is not something a discretionary system can do, getting plenty of practice is something the trader can and should do.
When evaluating futures trading strategies, the trader will need to consider the trader’s advantage and the size of the greater loss. The data that the trader must generate are: the percentage of wins (%W), the average win (AvgW), the average loss (AvgL) and the greatest loss. The trader’s “margin” is equal to %W*AvgW – (1-%W)*AvgL. This equation is known as “mathematical expectation”.
If the trader’s margin is negative or very small, trading this way will not work. The trader’s average monthly income will be the number of trades per month multiplied by his advantage. Again, the amount of trading capital will matter: a day trader with a $10 lead per trade on three trades per day will only average $600 per month if he is trading one contract. If he can afford to trade 10 contracts, his average profit is $6,000 a month, enough in most cities to sustain him.
In choosing the best futures trading strategies, a trader needs to consider his bankroll and personality, as well as whether the system makes any money. It makes no sense to buy a system that makes a huge profit if you lack the capital to implement it. Few people can change their personality to fit a trading system; a trading system that requires quick decisions will not work for a trader whose decision making is very methodical and thorough. The systems are cheap; trade capital is expensive. If the system fails, throw it away and start over.
Smart Asset.
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