Lessons from the Pros

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You hear it over and over again as a trader, and it takes many different forms: So how do you put this advice into practice? It is a scenario-based algorithm which attempts to compute the maximum loss your account might reasonably incur within one trading day.

The goal is twofold: You can find a lot more detail on the CME website. The CME and most other participating exchanges construct 16 scenarios, in which the prices of the individual markets are assumed to move up or down by varying amounts, while volatility is also assumed to go up or down. And what if you are holding positions in some closely-related contracts?

For example, maybe you are long an ES futures contract and short an NQ. Or perhaps you hold an iron condor spread on GC futures options.

Or maybe you put on a CL futures calendar spread. Or maybe you wrote a naked put on EC currency futures far from the money. This is where it gets complicated. SPAN will try lots of different ways of grouping your holdings to compute charges and credits to online options and futures trading with low margin overall margin requirement.

So if you add a new contract that truly hedges your existing positions, it will reduce the amount of margin you are required to hold. Exchanges and their clearing organizations must ensure that every trader holds enough margin to cover potential losses. SPAN tries to achieve both of these goals. It consists of four individual contracts, and a naive risk system using quantity limits might charge you four online options and futures trading with low margin the margin of holding just one contract.

If you want more functionality and are willing to spend more timeyou can also download the PC-SPAN app from CME and import parameter files for the exchanges you are trading. Using quotes currently in the market, its payoff diagram assuming no early exercise or assignment looks like this:. How much should we expect to need in margin to hold this position? In this case, SPAN online options and futures trading with low margin over 20x more capital efficient compared to a naive quantity limits algorithm.

It can enable a trader to responsibly hold many contracts, provided they are properly online options and futures trading with low margin. Or a calendar spread in the WTI Crude market? Each spread has its own margin adjustment, and you can see for yourself what it looks like with the online SPAN tool. I have never received a margin call, and if I make it through life without ever having a margin call that will be just fine by me.

In none of those cases did the process sound fun. Some brokers will liquidate your positions immediately and without consulting you as soon as a margin call occurs. Other more civilized brokers will contact you and involve you in the process of either posting more capital or making the necessary liquidations.

But it may not be a cheerful conversation. Best of all is to avoid the situation entirely. This ratio is computed by dividing your required margin by the current market value of your account. The reason is that a fast market move can quickly result in losses, and even if you have a statistical edge, you may find that temporary drawdowns can result in margin calls and become not-so-temporary. If you are trading in-and-out quickly, with automated stop-loss orders and a global system cutoff, you might be OK with more than that, because your system can be online options and futures trading with low margin to go flat before a margin call can occur.

And if you are trading defined-risk options spreads in which your max loss is well known in advance, then you can go much higher and still be safe. Every successful trader knows the importance of managing risk. I hope it helps you trade more successfully and sleep more peacefully.

There is a substantial risk of loss in futures trading. Past performance is not online options and futures trading with low margin of futures results. Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions. Focus on Factors in Your Control. About Optimus Futures Optimus Futures is a leading online futures broker that caters to traders seeking fast execution and stable data feeds combined with aggressive margins and deep discount commissions.

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One of the reasons many traders gravitate towards trading Futures is the relatively low start-up cost. We would all like to trade an account that has several thousands of dollars in it, but realistically, most traders have small accounts.

These accounts are still tradable, but you must have very strict risk management. When trading an undercapitalized account, you will find it much more difficult than trading a larger account. When your account has excess funds, you can build a buffer to help protect you against the inevitable mistakes and account drawdowns due to losses.

Unfortunately, small accounts do not allow you this comfort level. Larger accounts also allow a trader to be more diversified and flexible in their market choices to trade. Another nice feature of a larger account is you can trade more contracts when the need arises. A small account might limit you to trading one contract, and when it comes time to exit your trade, it is harder to manage. Because of this, you are faced with the question of, do I get out here or let the market run?

Usually, this turns into an emotional decision for most traders and they do not manage the trade well. We are all aware of the psychological challenges facing a trader, but a small account trader has even more obstacles. Traders with smaller accounts realize they cannot afford to lose much before they are not allowed to trade. Performance pressure will lead to costly errors. These types of traders usually start thinking that they will just take one or two ticks profit and slowly build their accounts up.

Unfortunately, the market volatility does not allow them to place a protective stop that is in proportion to the reward. Soon the market takes back all the small profits, usually in one trade. Even large account traders will have drawdowns losing streaks , but their account sizes allow them to continue trading without much added stress unlike a small account trader.

If you do have a small trading account, here is some help for you. I probably made it sound like small accounts cannot succeed at all in the Futures markets.

My intent was to make you aware of how much more care and selection you must put into your trading plan and decisions. This way you will not become careless and give back all your profits. An advantage that small accounts do have is that they are aware of how close they are to not being able to trade.

Therefore, they carefully plan and patiently wait for their trade setups unlike a trader with too much money in their account who will take trades on any whim at all because they feel like they are playing with house money. Trading Futures is all about using leverage and this allows smaller accounts to participate more easily than using a cash account to buy stock with. Keep in mind that leverage can cut both ways and losses can and do occur.

Also, in Futures trading, you can lose more money than is in your trading account unlike a cash account where your losses are limited to the amount you paid plus commissions. When placing trades, make sure your strategy is allowing you at least a 1: This conservative style trading will allow you to have one winner and then 3 losers before you are back to even again.

Apply this rule to day and swing trades alike. Give the market time to reach your price targets and do not cut your profits short. Doing so will ultimately lead to losses taking away your profits much quicker.

Many traders have a have a hard time taking a loss and will let their losses run, or have too big of a stop for their account size. This is also another reason to have a trading plan because it makes you trade consistently.

If you follow your plan, it is highly unlikely you will have losses in a row. Most traders who do suffer these types of losses are the ones who change their trading style after every loss, and therefore, have no consistency. By following them, you will have a much better chance of surviving Futures trading. Do not expect to double your account in the first year of trading. Many traders feel they should be able to do this. In all reality, you should be about break-even at the end of your first year.

If you can do this, you will have a good chance of becoming a successful trader. Most new traders start out making money in their first few trades because they wait for their setups and then take the trade. Then after a few profits, they become impatient and trade every time a market moves. In trading, it is not how much you make, it is how much you keep that is important. The formula above is the one I prefer because this will allow you to increase contract size as you become a better trader, and decrease it when you start to have drawdowns.

Keep in mind this is your maximum number of contracts to trade and you do not have to trade this amount on every trade. Make sure you have a well-written trading plan, you have confidence in your strategy, yourself, and plan on this taking some time and do not expect overnight success. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.

Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.