YM what is the absolute max liability one can incurr in?

Discussion in 'Index Futures' started by Cereal, Jul 14, 2011.

  1. Cereal


    If one trades one contract, what is the absolute maximum loss a single trader could have?

    I suppose it's not limited to the $6500 initial margin.

    Would it be the total cost of the contract, that is 5 x the Down Jones industrial Average Index at that given moment, i.e. if the Dow Jones is at 12,430 the total contract size in dollars is 5 x this = $62,150 ?

    Is this last amount the absolute maximum a single trader trading one contract could be liable for in the worst case scenario that the Dow goes to zero?

    Does anybody have the statistic of what is the maximum downturn or upturn that the dow has done in say one single hour ever?

    Ok, stupid questions I guess for some, but I was filling in the futures agreements with my broker I just thought I'd make sure of what I'm getting myself into.

    Thanks to anyone who replies even if only the first part of the question.
  2. dont worry, your broker will close out your posistions once your account value drops to a certain level and you won't be able to trade until you deposit.
  3. Cereal


    Thanks for the reply. Yes, but I would still be LEGALLY liable for any losses my broker incurrs in, even if I don't fund it further right?
  4. You are asking the right questions. In most cases the broker will close you out if your account equity can't meet the current margin requirements but you don't ever even want to let your equity get close to that point or in any danger of getting to that point. In case of a black swan you could still be on the hook and in debt to your broker. eg. limit down markets for consecutive days.

    If you are going to trade without stops don't use any leverage or use very very little leverage. eg trade one contract per 60k in your account when trading dow. If you are going to trade with stops make sure to have them at a reasonable level so you aren't losing more than a very small portion of your account per trade eg .05%.. Take volatility into account when placing your stops.

    If you are new to trading then don't trade live until you have a thoroughly tested , reliable method which takes into account every last detail . Market screen time and experience are very important. 5k -10k hours of experience is recommended before risking any serious money. In the meantime trade on sim for a long time and then start with 5k-10k of money that you can afford to lose while learning the emotional aspects of trading with real money instead of sim money.

  5. Cereal


    Thanks, I'm not entirely new. Been trading stocks, mostly day/swing for several months in real money, much longer in paper money.
    With futures just paper money so far, but since I will eventually get into real trading I needed to ask this question.
    I always trade with stops but I know that, even with a stop sometimes one might not be able to get out of the position, or at last not fast enough, so it's good to know what is the absolute maximum I am risking on the basis of one single contract.
    Worst case scenario then is the 62 K or more mentioned in my first post then?
  6. joneog


    The fact that you thought in terms of max liability is a good sign. Theoretically the max liability is infinite since a short futures positions can rise indefinitely. But the only way something like that could happen is some type of collapse of the monetary system - causing the dollar to collapse - in which cased we're all screwed, so it won't matter.

    In reality your max liability is probably more on the order of %5 of the notional value of the contract if using a stop and %20-%30 if not. If something really crazy happened I could see the YM gapping 500-1000 points down, probably less on the upside.
  7. to be absolutely sure you need to expect ~50% gap down in a major index (e.g. due to a nuclear attack). you must multiply your losses by the leverage taken.

    of course, that means that you can't really place any Long leveraged positions. one way around this is to always Buy put options that are far out of the money. This way you can limit your max loss to an exact predetermined level (10%, 20%, etc accounting for your leverage).

    the insurance will naturally cost you...
  8. The theoretical answer is your liability could be much larger than your deposit.

    The real world answer is that any decent broker now will have risk management in place on your account so that when it reaches a certain level, they will liquidate your trade and turn off your trading privileges. This is a good question to ask your prospective brokers so you know in advance.

    This also assumes you are not trading with stops and will let a position run against you heavily. Even a disaster stop would probably get you out before your broker liquidated you.

    Check around and see what you find. Open ECry has a good following on this forum and others. http://www.openecry.com
  9. rcj


  10. +1.
    #10     Jul 15, 2011