I'm trying to get a better understanding of risk management and position sizing when trading futures contracts for position traders, not daytraders. In equities my position sizing rules are: 1) I risk/bet 1% of my account per trade 2) I calculate my initial stop loss based on volatility using ATR 3) position_size = (account_size * 1%)/(initial_stop_loss) 4) A single position cannot exceed 10% of the total account size These rules work remarkably well for me. What is the equivalent of this with futures contracts?
I don't trade futures, but I would imagine it would work exactly the same way. Determine what is 1% of your account, determine the stop based on ATR or whatever, then calculate what is the loss per contract if exited at stop-loss and then calculate the number of contracts.
MTE, The part that is not clear is the margining with futures contracts.... doesn't it affect position sizing?
Why would it!? You can calculate how much you would lose on one contract (ES or whatever) if you exit at the stop. So, if you're willing to risk 1% of your account then the size of the position is equal to 1% of your account divided by the loss per contract. edit: On second thought, if you're willing to put only 10% into any one position then if the above calculation means that your margin requirement is more than 10% of your account then you should decrease the size to fit the criterion.
it shouldn't. normally you will trade a size way less than what your broker margin allows you to. it's an issue only if you have notional X and will deposit only a fraction of that for margin with your broker, in that case the question is not how many contracts but, after you have decided size, how much to deposit, possibly 2 times margin? the key is to ensure that you will never have problems with margin calls.
If my equity position exits at its initial stop, I lose 1% of my account. If my futures position exits at its initial stop, I also lose 1% of my account. No problems with this part, position sizing is working, risk management is working... The concern in using my equities position sizing method for contracts is: what happens if/when a black swan shows up? With equities, assuming I had only one position on, I lose, say 50% (a ridiculous amount for illustrative purposes) of that position, which equates to 5% of my total account -- remember I have a limit that no single positon should be more than 10% of the account. So, I lose 5% of the total account instead of the 1% bet size I had planned to lose, if/when a black swan event occurs. Now if I had the maximum 10 positions on all at once (all equities), I would lose 50% of the account. What would happen with futures contracts in this case?
you will get a margin call if the loss puts you below maintenance margin for the 10 positions. it will not happen because by then, you or your broker should have already closed all positions. not likely an issue for the most liquid 24-hour contracts in currencies, equity indices or treasuries.
The max loss on futures is the value of the contract. Of course, the market would be the least of your problems if anything like that occurred. If a futures contract drops 10% you are out 10% of the actual contract value not the amount you put in to maintain the position. So, Es is at 1212 right now and the contract is worth $50x1212 or $60,600. A 10% loss would cost you $6,060. This is mostly overnight risk -- which could be hedged if you wanted. As buzzy points out you should be pulling the ripcord long before intraday... Sam