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How do I Choose the Best Futures Trading Strategies?

By Ron Davis
Updated: Feb 22, 2024

There are many successful futures trading strategies. Among those, no one strategy is demonstrably the best. There also are strong mathematical reasons for preferring to have several futures trading strategies deployed simultaneously. Even if the trader’s bank roll is not large enough to trade from 12 to 20 different futures using two or three systems on each, he may well find that different classes of futures need different futures trading strategies.

The first two things a trader must look at are trading capital and time available. If the trader has a small stake, such as $25,000, success on an end-of-day basis may be problematic. Using a mechanical system might reduce his odds even further. If the trader has sufficient money to support his household for a year while he trades, day trading on $25,000 might work out.

The trader must consider his own personality. If he needs to know how trading decisions are made, an off-the-shelf system probably won’t work for him. Typically, they are what is know as “black box” systems, meaning the decision algorithms are undisclosed. If he has problems with attentiveness or decision making, a pattern-recognition-combined-with-judgment approach — a discretionary system — is probably not a good fit when combined with day-trading.

If a trader’s preference in futures trading strategies is for a mechanical system, the first thing he needs to do is to employ backtesting strategies to be sure the system is profitable. A discretionary trader needs to hire someone to train him or to train himself. While backtesting is not something a discretionary system can do, getting lots of practice is something the trader can and should do.

In evaluating futures trading strategies, the trader will need to look at the trader’s edge and at how large the biggest loss is. The data the trader needs to generate are: the percentage of wins (%W), the average win (AvgW), the average loss (AvgL) and the largest loss. The trader’s “edge” equals %W*AvgW – (1-%W)*AvgL. That equation is known as “mathematical expectation.”

If the trader’s edge is negative or very small, trading that way isn’t going to work. The trader’s average monthly income will be the number of trades per month multiplied by his edge. Again, the amount of trading capital will be important: a day-trader with an edge of $10 per trade across three trades daily will average only $600 a 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 many cities to support him.

In choosing the best futures trading strategies, a trader needs to consider his bankroll and his personality as well as whether the system makes money. There is no point in buying a system that makes a huge profit if one lacks 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 process is very methodical and thorough. Systems are cheap; trading capital is dear. If the system doesn’t work, throw it away and start fresh.

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