I'm a new futures trader with lots to learn but I wanted to start a discussion about realistic risk management in futures trading. Maybe it's just that the market is so volatile right now, but I've found it quite difficult to manage risk and still get in on trends. My plan was to limit losses to no more than 4% on any one trade. Because i've started with $11k, I just rounded that to about $400. Unfortunately, even if a contract generally trends the way I have placed my order (up if long, down if short) it's so very easy for the fluctuations to hit my stops along the way. I would love to hear some seasoned advice on this catch 22.
Which such little initial capital I'd advise you to use options to do your trading with. If you buy an option you know your risk immediately. $400 is 8 cents on a grain option. Granted your upside is dependent on the delta of the option but at least you can make some money on the swings and better define your risk. PM me if you want more info.
I'd also like to point out if your thinking about risk management at this point you are ahead of the game of most initial traders. Congrats on that!
I guess it's time to do some more research! I've spent the last three months just immersing myself in as much as possible about futures, but I haven't spent any time on options. Thank you!
For some good books on options I'd check out Sheldon Natenberg's "Option Pricing and Volatility". Another great book about some alternative option strategies is "The complete guide to selling options" by James Cordier. All the best.
As a new trader, options are absolutely NOT the solution to your problem. It's fine to say "Oh, I just limited my risk to a total of $400." But the odds are great that you'll lose 100% of that $400 time and time again, and have nothing to show for it. The options market is not structured to make it easier for you to make profits. It makes it much tougher. And you don't need that at this stage in your trading. Very simply, if you don't have the capital to initiate a system that has a decent profit profile while minimizing risk, then you need to get more capital. Period.
Stay away from options as a beginner. Once you know a lot more about them, you'll know enough to stay away from them. Risk management is difficult and expensive, although you can use futures options to limit futures risk (but again you're sacrificing profits for that risk management). Consider if you are looking to avoid normal risk (an adverse move against you stopping you out) or catastrophic risk (you're short oil futures and Iraq invades Kuwait). You can manage catastrophic risk with far out of the money options, but it's more like insurance. Better yet, just send me your money I'll send you back the profits
DOH! Another option -- use ETFs linked to commodities instead of the futures. So buy USO instead of oil futures. You lose the leverage but it's then impossible to lose more than you invested (on longs -- shorts could theoretically if the price went through the roof).
Hey buddy kudos on wanting to manage risk. I would recomend spread trading, I have had good sucess with it. IT can be very nasty (i.e. wheat/corn last year etc etc) but the good far outweighs the bad imo. Have you looked into spread trading at all
SideShowBob - First of all, love the name. I suppose you cut to the heart of it when you say that some of these other trade strategies provide insurance but limit profit. I want the insurance and ALL of the profits. RTrader 2525 - I haven't looked at spread trading. As I posted to someone else above, I think I have a lot more research to do. Do you know of a particularly good place I can go to learn about spread trading? Had a crappy day today and this is the second time that's been true on an overall down day for the markets - even though i only trade futures. Lesson learned. Oh these lessons... they are hard, no? Think I'll just have a beer (or 6) with hubby and count tomororw a new day.