4 Simple Steps for Smart Futures Trading

The trading strategy is very simple. It uses discretionary approach and consist of following steps:

  • searching for potential trades
  • detail analysis
  • trade preparation
  • trade execution.

I use this strategy for intra-commodity seasonal futures spreads on daily line charts.

Searching for potential trades

Once or twice per month I search for spreads with high probability of potential profit. Historically the percentage of winning trades should be at least 80% upon computer generated entry and exit dates. Afterwards I provide detail analysis of each spread.

Detail analysis

The goal of detail analysis is to filter out less stable spreads and keep these ones with high probability of potential success. I apply several criteria on each of them. Criteria will answer the questions like:

  • How strong is correlation between current spread and historical patterns?
  • How did spread behave in the history?
  • What are the statistics from backtest, for example percentage of winning trades, cumulative absolute return, risk reward ratio, average stop loss and profit target, drawdown, etc.
  • What is the current price level comparing to the history?
  • What is the behavior of each leg of spread (is trending, daily change, volume, etc.)?

At the end there are usually one or two candidates which fits my criteria and some less favorite ones which make sense to watch. All these candidates I add into my watch list.

Trade preparation

Every day it takes me several minutes to monitor the spreads from my watch list. I observe seasonality and waiting for entry signal. I pay little attention to fundamentals. I just need to know when is the release of important reports (eg. WASDE). Few days before planned entry I provide technical analysis.

Trade execution

  • I enter the market based on the pattern (head and shoulders, breaking the support or resistance, 1-2-3, etc.) and seasonality.
  • Resistance and support levels I use for setting and trailing stop loss and profit target.
  • Risk per trade is around 2% of account size.

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