I start to see the risk here now... How is this for risk managing futures (if in your opinion it should be different for index futures and or commodity futures, it would be great to hear): + Always keeping hard stops in the market. If stop limit, the limit should be very far away so there's a chance to get hit even at a major blow to the market. + Always checking so there's no unwanted positions or orders laying around at the end of the day. + Always keep a backup for Internet connection, computer and broker (any ideas for good backup brokers?). FrasierK
Your catastrophic stops should be stop limit orders if the exchange permits....Tip: always spread the stop limit threshold with 10 points so that you will have the time needed to turn it into a market order even if in a fast moving scene..... There are no guarantees trading Futures.......This is speculation! Never segregate more than 15% of your total capital......Then apply trade by trade money management to that segregated portfolio. Try to get yourself in a position, to get back your 15% and take it out of your account used for Futures trading. This way you can truly say that you are gambling with money you can lose (the houses money) Speculation can be useful to investors by increasing their yearly percent return in their total portfolio. If you are an exceptional trader and know how to manage your losses, then your in just a handful of folks who can consistently make a living in Futures trading from your living room using the internet and retail brokers. Michael B.
Thanks Michael, I'll remember that tip. I'm pretty sure I'll go for the futures market, even though it may be tougher in some senses (more professional competition seems to be one), it seems more orderly in many other. When you say spread 10 points, do you mean I should set a limit to my stop at 10 points away from the stop - in the case of ES equalling about 1%? Why not set it 100 points away, which would - theoretically - give me a chance even on a black monday crash? Any thoughts for or against using such a large limit?
Indices are very unlikely to drop to zero overnight. I mean even in 9-11 the gap wasn't that enormous. However if you are short..... and something really nice happens in the world.... you may have a problem. You are still at much less risk than if you are trading stocks. One day a manager catches a cold and the stock drops 70%. Anyway if you are with IB they have forced auto liquidation. Once the account drops below the margin req. or below zero they liquidate your position automatically and you can't do anything about it. If liquidation is not possible and you drop below zero, then you owe them money. If you want to insure yourself completely against a such a scenario you can trade remote with a prop firm that does not hold a trader liable for money owed (you don't legally owe them money when the account drops below zero). Most prop firms are like that (not all though). Alternatively you should hedge yourself with options when you're holding overnight. The premium paid for options is literally insurance premium. It takes away some of your potential profits but it insures you against a disaster. 50
Thankyou for your reply 50. It seems that with IB, having an account with no more than the necessary amount of money (the margin for the number of contracts I plan to trade) is a good idea. My other thought that I was wondering about was what limit to use to my stops. I've heard that setting a limit of about 10% (about 100 points on the ES) is preferred compared to let's say 1%, at least for long positions. The logic would be that in case of a huge sell-off, 10% limit would have a good chance of being triggered whereas a 1% limit would not. Any thougts on this?
You can't know that... because you don't know what is the character of the huge sell off / squeeze. There could be a huge gap up in the morning and right at the open it would sell off all the way back down (e.g. saddam's capture day). If you keep a small account, you'll surely get liquidated at the open. If you have a larger account, you have a chance to rebound the whole loss. Many gaps and especially spikes get filled right away. There is no answer for this, this is pure guessing and gambling. I can only tell you what I do: I NEVER hold positions over night, other than long options (calls or puts). This way I have capped pre-defined risk and unlimited profit potential (I can either exercise or sell the options). The only way to completely insure yourself against these disasters is to either be hedged (e.g. go long the contract but buy put options), hold capped risk instruments (buy options), or have someone else take the heat (go prop). otherwise you're guessing in the dark. You can't tell what type of scenario will occur.
Truly good advice here. As for now, I'm mostly daytrading for the reasons you mention. My main focus is always on risk/money management. If and when I get to trade some size in futures, I'll take a look at your hedging advice again. Thankyou.