misconception about futures

Discussion in 'Index Futures' started by sabena, May 11, 2002.

  1. sabena


    Is trading futures more risky then
    trading stocks ?

    Most would answer "yes" to this question.

    If define risk as the % amount of your capital
    you put on the line then futures are NOT
    more risky.

    Suppose you use a leverage factor of 5.
    What you actually achieve is that you amplify
    small movements with a factor 5.
    In fact it is lile you are travelling in a
    time machine, you can make the same return
    in a time period that is 5 times smaller
    then somebody who is not using leverage.

    Futures are just regarded as more risky
    because you win quicker money or lose it
    "quicker" refers to the time factor.

    One guy uses no leverage and put his stoploss
    at 2 % of his capital, another uses factor 5
    leverage and put his stoploss also at 2 %
    of his capital so they BOTH risk the same
    amount of their money, the last one is not
    taking more risk because he uses factor 5
    leverage then the first one.

    The extra risk for the one with leverage factor
    5 is the execution risk that the market blows
    through his stops.

    Again, the leverage factor you use is the
    factor at which you travel more fast through
  2. It's like asking

    What weighs more? A pound of feathers or a pound of gold?

  3. Good question sabena...There is one little nuance about futures that I feel makes them a little more risky than stocks. Futures will often open locked limit down or up and if you're on the wrong side it can be several days of locked limit moves before you can get out. However, with the indexes you don't have this problem. Usually, it's with corn or something like that. Just a thought...have a nice day.
  4. One guy uses no leverage and put his stoploss
    at 2 % of his capital, another uses factor 5
    leverage and put his stoploss also at 2 %
    of his capital so they BOTH risk the same
    amount of their money, the last one is not
    taking more risk because he uses factor 5
    leverage then the first one.

    the problem is if that stop is blown either by outside events or the deer in the headlights syndrome.the guy with equities and no margin does have less risk than the futures trader with 5 factor leverage.
    do a search on si.there was a guy who lost 75% of his account because he had a stop on a futures trade when greenie moved and it blew and he was filled hod.dont ever forget that with futures you can lose everything in an instant if you are margined big enough and a big event happens.it may be rare and unlikely but it is there.
  5. stevet


    if you can trade futures - you realise how naieve you would have been to trade stocks - without understanding futures and its relationship to the cash market

    so are futures more dangerous to trade than stocks!
  6. brich



    F 16's pilot have more risk than 747's pilot.
    But still many want to be F16 pilot and happy life, thats a life.
  7. Hi Stevet.

    Could you please elaborate a little more on your comment about stock trading vs. futures trading sopecifically your comments about stock traders being naive. I find that statement quite compelling ...
    thanks in advance
  8. Fohat



    What is the risk of $30,000 account trading 800 QQQ shares or one NQ contract?
    Answer: Absolutely the same. No more, no less.

    What is more risky trading with a $30k account: one ES or 500 SPY shares?
    Answer: The risk is absolutely the same.

    But on the other hand: Trading 1000 QQQ shares is more dangerous than trading 1 NQ. Trading 600 SPY shares is more risky than trading one ES. Why? Because in this case more leverage is used with stocks than with futures.

    Risk=Leverage. Equal leverage = Equal risk, like in the example with 800 QQQ and one NQ. Use more leverage while trading stocks, and you'll incur more risk than trading futures, and vice versa.

    So, What weighs more? A "pound" of stocks or a "pound" of futures?
    Answer: They weight the same.

    Trading stocks with higher leverage is more risky than trading futures, and vice versa.

  9. This question is all about leveraging or de-leveraging...The various brokers will offer daytraders something akin to 30-40x leverage on the actual contract value and traders who use this margin are obviously increasing their catastrophe risk...And I think that this is something that really needs to be appreciated and respected because it is one thing to have a stop and another thing to actually realize that at least once or twice a year there is going to be a price shock that will run the indicies 10,15,20+ handles in a moment's notice...So, it is one thing to place a set risk and another thing to realize that you have enough capital to withstand a major price shock...

    If you de-leverage futures and trade with a reasonable dollar value per contract, then you greatly diminish the effects of a price shock on the account...That alone should give a trader enough confidence to be in the market in almost all circumstances given the fact that a major price shock will not completely destroy him/her...

    I would have to say that de-leveraged futures are probably on par with stock trading considering the fact that you have 500 stocks in the S&P 500 and 100 stocks in the NAS 100 to offset the price shock of any individual component...You also have major price commitments at many levels under most circumstances...But like anything else, the longer you hold the security the more prone you are to expose yourself to some sort of price shock, so this could apply to both futures and stocks...

    I just think the question all comes down to leveraging...
  10. ChrisM


    It would be too easy desribing the difference in just one post. No doubts they are similar as well, as so different.
    In the last (May) Futures magazine there is an article by Howard L. Simons comparing some statistics of both.
    If You consider volatility as one of the major factors of trading here is surprise: traditionally many people think that stocks are "smoother". Not any longer. The top of this ranking list is occupied by Inet stocks, most futures contracts are placed on the bottom of this list.
    However, stocks trend, commodities revert to the mean. Our historical studies show that are very few concepts of trading working for both. At this point they are very different.
    #10     May 12, 2002