Hello Fellow Traders, I've posted here before and received some helpful advice so I thought I would try again. I starting to dip my toe into in trading Futures, mini-sized Dow. I've researched in quite some depth the nature of the product and I understand the basics. For example, If I bought 10 mini-sized Dow contracts and the current price of the contract was $10548 and it moved 27 points to $10575 that would equate to a profit of $1350.00 10575 - 10548 = 27 points 27 Points x $5.00 per point = $135.00 10 Contracts x $135.00 = $1350.00 Now, I was wondering if someone to give some idea on how they manage risk? I'm sure some of you would say I ought to manage risk in futures the way I manage risk with equities. However, I'm having problems translating the way I manage equities to the way I might manage futures. For example, when I'm trading stocks I normally base the number of shares I wish to trade on how much I willing to lose/risk on a trade. So if I stock is currently priced at $8 and the high was $10 and the low was $7 my entry would be the high and stop would be the low. Now if I wanted to risk say $100 I would purchase 33 shares: Number of shares: 100/(10-7) = 33 Can someone please guide me as to how relate the above risk management to futures, mini-sized DOW? I only intend on buying one contract to start off with. Because the mini-sized DOW works on a point system and I'm only going to be trading a single contract I'm quite confused. If you guys could show me how you manage risk, or point me to relevant websites I would be very grateful. I hope I've explained myself well enough to get some positive feedback, however if you need additional clarification please let me know. Cheers Carlton
That is not the trade risk. The trade risk depends on the maximum loss, your bankroll and number of shares: No of shares x maximum loss = Risk x bankroll solve for No of shares: No of shares = Risk x bankroll/maximum loss Same formula hold for stocks and futures. This is a good paper on this subject: http://www.priceactionlab.com/Literature/PositionSizing.pdf
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and impact of unfortunate events.
it is very simple if you have a pen and a piece of paper your account is say $50,000 your max risk per trade (for beginners) is $500 this equates to 1% and will thus give you 100 losing trades before you are broke now you start trading $500 / $5 = 100 pts on 1 YM contract now that you know your max stop is 100 pts what will you do next?
Thanks for responding Well let's say the current price of the contract is $12500, I would place a stop at $12100. Correct?
am not so sure if you can size 10 for YM, its daily volume nowadays is only ~80k. 3-5 is probably still OK though. Theres tradeoff between moving range & contract size, futures with large range usually with lower daily volume like YM/TF/FDAX. size according to your risk appetite, that depends on your capability to read market if you are able to catch the low risk point. for example, usually i risk bout 2-3 ticks when trading ES, thats ~$42/contract. So, if i can take $100 risk, i will be able to trade 2-3 ES contracts. but if u dont have the capability to read the market properly & risk more than 5 ticks (usually trade conventional textbook way like breakout/pattern/indicator) which is ~$70/contract, then you'll be only able to trade 1 ES contract.
just because your max stop is 100 pts this does not mean that you have to sit there and look at the price drop to hit your stop. your max stop is to protect you in case the market suddenly drops or rises for whatever reason. this is a common mistake that all new traders make and it is mostly due to the vast amount of rubbish trading books that are available your exit will depend on the time-frame you are trading, the time of day and what is actually happening in the market you need to have a plan of action that covers various scenarios you should never let a winning trade turn into a losing trade, no matter what the experts say you must be able to understand what is happening in the market at the time you are trading. you do not need to know everything that affects the price movement but you do need to know when the price is now moving and in what direction it is heading some will say you need to use a $500 stop on the futures to trade it successfully and others will say you need only use a few ticks.\ you should use whatever is required based on the odds of your next trade being a winner. in order to know the odds you must know what you are doing. in order to know what you are doing you must have gained enough experience with live trading. in order to gain enough experience with live trading you must be very conscious of losing and make sure you do not risk too much on any one trade trading is easy once you learn how to trade correctly but for most it is hard as they never get enough live trading experience to learn here is a tip that will save you a lot of time and money. keep your money for your required trading experiences and never part with it no matter what you think others might know. those who know do not part with what they know very easily as it has taken them a long time and a lot of money to get to where they are. the funny part of it all is that is is really very very simple, which is why it is so hard for most to understand and experience if one part of the equation is your $ risk, then what is the other?
My broker put out a blog post out last month about calculating risk. I found it helpful although I thought it was geared more towards beginners. I thought it might help.
dont trade YM -just because the tick value is $5 while ES is $12.5 YM a few hours a day has a spread of 2-3ticks.. while ES is 1tick. also you will pay more commission for trading multiple YM over ES. the trading ranges give both similar risk profiles.
Hi Oracle, Thanks for responding. This is my biggest problem right now. I often find myself in profitable positions but they end turning into losers. But I'm working on it. Cheers mate