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Basics of Futures Trading

By: Dean Whittingham
All professions whether it be sport, business, or trading have what are called the basics and if you’re starting out in a new profession, the basics form the foundation or the core. However if you’ve been practicing your profession for quite some time and feel you’ve gone off track or are not hitting your goals, usually the best thing to do is just get back to the basics: and trading is no different.

This is not an article based on emotional discipline or psychology, it is based on the basics of a trading plan, and it really doesn’t matter if you’re long term or short term, the basics apply to most market participants. Some may have trading plans that are quite different to the basics however for the majority who are relatively new to trading or are struggling, the basics are by far the best approach to adopt.

The basics are split into three and are:

1. Determine the trend 2. Wait for a pullback 3. Enter on an event or pattern

1. Determining the trend can be a discretionary or mechanical decision.

For example, a lot of traders can pull up a chart and instantly determine it’s going up, down, or it’s sideways and choppy, and if it’s the latter it is best left alone; this is a discretionary approach.

For other’s they need some tools to make that decision for them such as moving averages, MACD or trend lines to name a few. All have their pluses and minuses and it usually helps to use a couple of tools or to add some discretion.

I’ll give you an example of a completely mechanical approach to determining a trend.

Set up a 200 day simple moving average (200 SMA) on your chart. Also add the indicator ATR (average true range) and set it to 100. If you take the current 200 SMA reading and the reading from 50 days ago, the difference needs to be greater than 4 times the current ATR(100) reading.

For example, if the current 200 SMA reading is 60 and the reading from 50 days ago is 50, that’s a difference of 10. If the current ATR(100) reading is 2, multiplying it by 4 gives you 8, and as such means you are in a mechanical uptrend. The opposite applies to downtrends or bear markets.

2. Waiting for a pullback simply allows you to get on board a trend at a cheaper price. It can become somewhat of an issue for many as it’s hard to time when the pullback has ended or to determine if indeed the trend will continue. It could end up being that the trend has ended.

Keeping it simple is the best policy. Oscillating indicators are great tools for this very purpose, such as Stochastic or RSI to name a couple. Oscillators such as these have what are called over-bought and over-sold zones which you should become familiar with. When in an uptrend, a pullback in price coupled with an over-sold reading on your indicator is telling you it may be time to look for a possible trade to go long.

Using an RSI (14) is a popular method for determining if a pullback is over-sold when it reaches or goes below the 30 level.

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