Ask any successful trader how he or she became successful, and you will consistently hear that the person had a trading plan. This plan guides a trader when he or she is making profits and, more importantly, when the trader is losing money. A useful trading plan covers three key areas. It:

1. Determines what markets you should be trading based on your risk and volatility levels
   
   
2. Maps out the exact technical and fundamental tools you will use to enter trades
   
   
3. Helps you plan for the ways you react during a losing streak, as well as a winning streak
   

A 30-question trading plan document allows any trader, novice or advanced, to develop a customized trading plan. Once you have completed the questionnaire, you will have a blue print for your trading success you can reference whenever necessary. This article provides some of the questions from that trading plan, dissected and answered. If you want the rest of the questions, you can contact me to get a free copy of the complete trading plan questionnaire.

Let's begin.

What is your account balance?

The money in your account is not “play” money. Just because it is risk capital doesn't mean it’s not important. You must always know your account balance. If you don't know where you are, how are you going to know where you are going? Risk capital still has value -- if you intend to be successful. So many traders bring a gambler's philosophy to the markets, thinking like a gambler in terms of “house money versus my money”.

For successful traders, “house money” does not exist. If you earned it, it is your money, no ifs, ands or buts. By removing the gambler's philosophy from how you treat your money, you will begin to balance your account much like a checkbook. Be constantly vigilant about how you view your trading capital. Risk capital should not be treated as already lost.

What are your true commission costs?

When you know your commission costs, you are also aware of all of the various other costs associated with your trades. As we all know, these associated costs come in the form of “brokerage charges”, “exchange fees”, “NFA fees”, and so forth.

If your bank tacked on fees here and there on every transaction, you would demand an explanation and, then, based on the explanation, you would make it a point to keep track of those fees and continue to question them from time to time.

In the same way, in the world of trading, no matter what a publicized commission rate is, you must understand that your true commission rate is inclusive of all ancillary fees, not exclusive of them. Be careful not to be fooled by low publicized rates.

Who’s your broker?

If you don't know the name of your broker or have a contact at the brokerage, you don't have a broker. Make it a point to get the name of your broker, his or her manager, as well as an alternate broker to work with in the event that your regular broker is not there. Often, when we are trading, we are entrusting thousands, if not tens of thousands, of dollars to an institution we don’t really “know”.

Regardless of whether the brokerage is licensed with the CFTC or a member of the NFA, it is important for you as a trader to feel in control of what is happening when it comes to your money. In addition, it’s important to be aware of who is handling your account. It is not the duty of the brokerage firm to make this information available; it is your duty to demand it.

What is your investment goal?

Time and time again, traders make the mistake of not having a specific profit goal in mind. Unfortunately, too many traders simply want to make as much money as possible. If it were that easy, everyone would be doing it. To be successful in any endeavor, you have to know what your finish line is, so you can get geared up for the next race.

For example, analysts say that, over time, the stock market has had a return of 10 - 12%. In that same long time frame, bonds have averaged 3 - 5%. If these are the normal returns, what really makes you believe that you can do a 10,000% return in 6 months to a year after reading one book or buying one set of software?

To create a sincere return-on-investment goal, look to the money managers of the futures and options industry. Find out what the top, large and small, CTA money managers are earning. After that, look at their experiences, the markets they trade, as well as their strategies. Compare all three of these things against what you are doing. From that point on, you will be able to develop for yourself a reasonable profit expectation goal for your futures trading.

This is not to say you might not one day pick a stellar trade that will give you that amazing 10,000% return, but what it does mean is that you won't try to make “every” trade a stellar trade. This approach is not glamorous, but it gives you a sense of control over your “what-if” daydreaming.

What markets should you trade?

How you answer this question will ultimately determine your longevity in futures trading. Many factors determine which markets are best suited for you. Do you want to trade very volatile markets or low volatility markets? Do you live on the West coast, and it’s difficult to see the 5 a.m. opening bell for the currency and gold markets? Do you have a full-time job, so you can't stare at your screen all day long? The market or markets you pick to trade should best suit your lifestyle.

It is also important to pick only two to three markets that you can potentially master. It is difficult to understand and trade the subtleties of every single market available. While technical analysis can be applied across the board, it is only when you function as a specialist in one that you begin to understand what actually makes a particular market tick. You can then manage your money and your trades according to the rhythms in that market.

By focusing on a handful of markets, you can become a specialist. Without a doubt, specialists in any field have a tendency to be more successful.

What are you trying to do with futures speculation?

Know why you are trading futures. Is it for fun, like gambling? Or, is it a true desire to speculate? Or, are you trying to “hedge” your overall investment portfolio? What many investors forget about futures is that there are two aspects to this type of trading. It can be both the riskiest investment and the least risky investment at the same time, if you let it.

For example, during the dotcom bubble, many investors had mutual funds and stocks that closely matched the NASDAQ 100. When the market began to slow down and investors found themselves in the precarious position of not knowing if they should liquidate their tech stock and investment portfolios, they could have simply used NASDAQ futures to protect themselves from any quick drops in value.

By looking at futures from both sides, speculating and hedging, you can come up with more versatile strategies for managing your money over the long haul.

How will I get out of a losing trade?

While 80% of your time is spent trying to pick a trade, the most valuable part of your time, the remaining 20%, you have your cash on the line. Most traders fail because they are unable to manage that 20%. Because the majority of trades end in a loss, it’s important to be able to make a clean break.

There are several ways to do this “at the market”: With mental stops, hard stops (which have an option component to guarantee specific prices), soft stops (which are triggered into becoming market orders) or margin calls, to name just a few.

The level of volatility in a market will determine your reactive response to losing trades. Whatever you do, stick to a loss of no more than 2 - 5% on an individual trade.

What type of volatility do I want to trade? And, why?

At www.investopedia.com, Volatility is defined as “...the tendency of a market or security to rise or fall sharply within a period of time.”

It stands to reason that the greater the market volatility, the sharper the rises and falls are. Conversely, the less the market volatility, the less sharp the rises and falls. So, you have to know your pain threshold. Know the daily ranges between the lows and highs of each market you would like to trade. Find the ones with tighter price ranges, in real dollars, if you like low volatility. Find the markets with the wider ranges, in real dollars, if you want high volatility.

Doing this simple assessment can save you from unhappy surprises when a market turns against you.

What percentage of my account do I want to place on each trade?

Futures investing is simply “leveraged” investing. The amount you put in your account may only represent 5 - 10% of its total value in the marketplace. To be successful, you must be careful to expose yourself as “little” as possible to the total leverage available to you.

For example, stock investors are used to investing a specific dollar amount and having it committed 100% to the market. This all or nothing attitude can quickly backfire in futures investing. The reality is that you are capable of putting up only 10% of the money necessary to profit from that same 100%.

So, logic dictates that, if you put up to 100% of your account on margin, you are actually 1,000% exposed to the markets. You are “over-leveraged”. While it may be unusual for you to have cash sitting around in your stock investments, cash sitting in your futures account is a good thing. Don't let it burn a hole in your pocket. It gives you the opportunity to bounce back from trades that don't work out.

How many contracts do I put on at a time ?

Definitely think about this. Too many traders over-leverage their account. Keep in mind that your leverage in futures trading can be as high as 30 to 1. This means that every single contract you trade is like making 30 trades all at one time. So, each contract you add on to a position is the equivalent of another 30 trades. That means that, if you trade 10 futures contracts with a 30-to-1 leverage, you have effectively done 300 trades.

Because so many traders come to futures trading with only a small amount of capital, it is best to learn how to trade 1 or 2 contracts at a time. I suggest that, for your first 10 trades, you stick to these contract sizes. You will be pleasantly surprised at how easy it is to manage your money and track the successes and failures of your trades.

If you wish to increase the number of contracts you trade, keep in mind that you should never have more than 30% of your total account value on margin at any given time. This way, you can weather any ups or downs.

How long do I hold on to a trade?

As a trader, you should know the rhythm of the market you are trading. If the market runs in 7-to-10-day cycles, you should let your winning positions run in 7-to-10-day cycles when it comes to grabbing your profits.

Whether the cycle is two days or two weeks, maintain your winning trades as long as possible. Many traders are so fixated on being “active, day, swing or position”, they miss the fact that they really don't have a choice. The market dictates what kind of trading you will do.

How will I determine trades?

Thoroughly understand the system you are trading. Make sure that, however you pick your trades, you are fully in control of the final decision. Claims about many “black box” systems out there say they “never” fail. However, when it comes down to it, if something catastrophic were to happen to the developer or if the program does fail, and you’re using it, you have no one to blame for your losses but yourself.

If you have your own system you have developed, document it. It is important to be clear about the rules of the system and to force yourself to stick to it with little to no deviation.

Getting Started in Technical Analysis by Jack D. Schwager is a great tool for understanding how each technical indicator works and the parameters that trigger buy and sell signals.

If I lose my investment, am I willing to invest again?

If you cannot answer this question honestly, you should not be trading. The Commodities Futures Trading Commission (CFTC) statistics state that 90% of all futures speculators lose money. No other investment documents such high losing ratios.

Therefore, there is a high likelihood of blowing out your account before you reach your profit goals. Be psychologically prepared for that possible event and financially prepared to make a second go of it if you are determined to succeed.

What will my money management strategies be?

Clearly understand how and why you lost money in the past. Define those financial mistakes and rein them in. Here are some cash rules to protect against losses:

• Don't risk more than 2 - 5% of your total account value on one trade.
  
  
• Don't risk more than 10% of your total account value on all of your trades for the month.
  
  
• If an expected move in a market does not occur within two to three days, exit the trade immediately.
  
  
• When you make profits in excess of your beginning balance, put them in a separate account.
  
  

Please use these suggestions as a guideline to your own trading. If you can take more or less risk than I have suggested here, please adjust the parameters according to your risk thresholds. At the end of the day, the name of the game is capital preservation.

Is it more important for me to be 100% right about the market’s direction or to be profitable?

How you answer this question will determine your success in the markets. If you allow your ego to constantly cloud your vision, no system, no holy grail, no market guru can help you. As a student of the markets, you must truly listen to the one thing that matters...the markets.