Managing Your Futures Trading/Position 3.15.2016

Greetings! 

FRONT MONTH for STOCK INDEX is JUNE!!

A note on managing trade size by my colleague, John Thorpe who has over 25 years of experience starting on the floor of the CBOT.

Managing your trading/position size is crucial to long term success regardless of style.

Daytrading, Swing or long term position trading.

In order to select the size you will employ make a mental note of three things before you trade.  The Foundation of Trading your plan is first determining the size you will be employing, the number of contracts.

We must assume your risk capital is fixed.

1)  How liquid is the contract I will be trading?

Are there frequent price gaps, lack of continuity with bid/ask spreads.

What is the Open Interest and Volume relative to other contracts in the same industry, index , futures contract type.

2)  What is the nominal cash value of the Futures or Commodity contract you are going to trade? S&P 500 at a price of 2010.00 X $50 = $100,500.00,  How deep are your pockets? Then the day margin is only 500.00?

#2 Yellow Corn $3.72 per bushel x 5000/bu = $18,600.00   roughly 19 percent of the ES.  There is a notable difference.

3)  What has the near-term dollar value volatility been for the market(s) you are anticipating?

Let’s use The ES  and ZC ( Corn) examples from today, The ESM6 hi was 2015.00 and lo 2002.00 that’s 13 points or $650.00, a quiet day  and for the Corn? 3.74 hi  and 3.7025 lo  3 ¾ cents per bushel that’s $187.50.

You can more easily see through this example how important your size is in managing your expectations.

Plan your trade around greater volatility than the market currently reflects, be ready for a 39 point range in the ES and a 10 cent range in the corn, I like to use a multiplier of 3 after I calculate dollar volatility.  If you do these three things consistently, you will find that you have traded the correct size to your benefit.

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GOOD TRADING

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.