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.
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.
[Related -Pfizer Inc. (PFE) Q2 Earnings Preview: A Penny Here a Penny There]
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.