Futures Contracts Position Sizing

[andysmith]

Sam,

Your example is very helpful. Using hypothetical round numbers, say the account size is $100,000 and fully allocated to trading ES, bet size is $1,000 and initial stop is 20 points (which is $1000 max loss). So, the position size is 1 contract.

OK, fine. Now let's say I use a system with a 5 point initial stop loss ($250) and I bump up my bet size to 2% ($2,000). Then the position size becomes 8 contract. $100,000 account to trade 8 contracts means ES can drop 250 points in a black swan event before the account is worthless.

However, from what I've read on this and other boards, folks are trading 8 contract with far less than $100k. So I'm still not seeing the picture:

1) How many contracts would an experienced ES trader trade with a $100,000 account?

2) Are futures traders purposely keeping small accounts so that if a black swan event does occur, they lose their margin and no more? For example, say I have $5k in my account and am long 1 contract and ES drops 300 points (assume markets close, can't liquidate,...). The $5k in the account covers a 100 drop for the 1 contract I own, but who pays the other $10k (200*50)? Who is liable for that?

 

[psytrade]

Andy, what is the ATR value for your stops in equities? I've found I had to use 15 * ATR (10) to get the best EOD trend following system results. Just curious what other traders are using for ATR stops.

 

[andysmith]

psytrade,

Did you mistype 15 instead of 1.5? I've found that 1 ATR(10) is around 2.5% for most of the stocks I trade. I use 2.5 ATR for the money management stop but make it tighter if the market conditions require it.

 

[-ooO-(GoldTrade]

Too much unused capital!

A recent kcbt seasonal wheat spread is up 600% this month. Your Algorithm returned 6%. How much would you have made if you put 30% in wheat. What about 30% and pyramiding every time you earned double margins. 1% is a total waste. Go take a Tharp class if it makes you happy!

 

[andysmith]

Goldtrade, you have a lovely wife

 

[ssternlight]

Quote from andysmith:

Sam,

Your example is very helpful. Using hypothetical round numbers, say the account size is $100,000 and fully allocated to trading ES, bet size is $1,000 and initial stop is 20 points (which is $1000 max loss). So, the position size is 1 contract.

OK, fine. Now let's say I use a system with a 5 point initial stop loss ($250) and I bump up my bet size to 2% ($2,000). Then the position size becomes 8 contract. $100,000 account to trade 8 contracts means ES can drop 250 points in a black swan event before the account is worthless.

However, from what I've read on this and other boards, folks are trading 8 contract with far less than $100k. So I'm still not seeing the picture:

1) How many contracts would an experienced ES trader trade with a $100,000 account?

2) Are futures traders purposely keeping small accounts so that if a black swan event does occur, they lose their margin and no more? For example, say I have $5k in my account and am long 1 contract and ES drops 300 points (assume markets close, can't liquidate,...). The $5k in the account covers a 100 drop for the 1 contract I own, but who pays the other $10k (200*50)? Who is liable for that?

My thoughts:

1) That depends on the type of trading system, it's metrics, and the trader's risk tolerance. There isn't a hard and fast answer to the question as it is phrased. The thing to remember is that you are using a great deal of leverage and leverage is a two way street. So, you need to really understand how the volatility of your particular approach plays out in practice. The practices used by other traders should not necessarily play a role in scaling your own trading approach.

2) You are obligated for all losses. The clearing agency will come after you in court. So, account size is not the issue. You might read up on SPAN requirements to understand how the clearing agencies look at margin requirements and why. On a black swan though, you are just going to bite it.

You might find it worthwhile to look at OptionCoach's thread on selling OTM index spreads. He has to manage lots of risk on a regular basis -- which is essentially what you are exploring.

Sam

 

[psytrade]

no andy, I meant 15. In Amibroker, I need to use that setting. It translates to about a 11-13% stop loss

 

[tomcole]

I bet with your strategy of taking 1% losses, you will be wiped out in 20 days.

Send me a check for $50,000, keep the rest and technically, you will have come out ahead.

If you focus on taking losses, thats all you'll do. If you're scared of the market being a bully and eating your lunch, thats what happens.

Try and be positive and see what happens. You need to go read jesse Livermore's book.

 

[-ooO-(GoldTrade]

These 1%ers put on about 50 stocks and tell each other how great they are when one of them comes on and they make 10%. Big Deal. You donÕt put on 50 different futures. And you donÕt trade your own funds like you would do for some widows or orphans. Just double your pile and take your original capital "scared money," out and begin trading.

Quote from a Stock Trader:I'm trying to get a better understanding of risk management and position sizing when trading futures contracts for position traders.

In equities my position sizing rules are:

1) I risk/bet 1% of my account per trade

Are you saying it takes a hundred trades to use your original capital, if nothing goes up?

2) I calculate my initial stop loss based on volatility using ATR

Is that the volatility of the time just passed or the expected volatility during the part of the year you expect to hold the trade?

3) position_size = (account_size * 1%)/(initial_stop_loss)
4) A single position cannot exceed 10% of the total account size.

Does this imply that you will sell your winners based on this limiting formula, instead of market action?

What is the equivalent of this with futures contracts?

With futures pyramid your winners, and let your profits run. There is no equivalent to cutting your winners short, and limiting your speculation to a tiny part of your trading capital.

Quote from buzzy2:it shouldn't. normally you will trade a size way less than what your broker margin allows you toÉ possibly 2 times margin?

Buzzy is really right on here. Double margin is plenty. You might start a trade with double margin then as you are growing and pyramiding move out to three times or four times. Volatility (probably of the last 90 days), is built into margin already.

the key is to ensure that you will never have problems with margin calls.

Actually margin calls are a good thing. They alert you to when you are overtrading. The more excess you leave lying around, the more that will evaporate before you get the call. The rule that goes with this of course is ÒNever meet a margin call.Ó

Stock Trader> Now if I had the maximum 10 positions on all at once (all equities), I would lose 50% of the account. __What would happen with futures contracts in this case?

It can happen of course like 911. But, usually when you are diversified in uncorrelated contracts or spreads the same events will not affect everything the same way. The wealth has to go somewhere. You should be getting as well as giving.

Stock Trader> However, from what I've read on this and other boards, folks are trading 8 contract with far less than $100k. So I'm still not seeing the picture:

Eight spreads, sixteen contracts, double margin $8,000.00 with self generating pyramids. Do you need help with the math?

Quote from tomcole: Try and be positive and see what happens. You need to go read Jesse Livermore's book.

In Summery I agree with Tom completely.

If anybody needs a copy of Jesse Livermore's book email me

 

[m22au]

If your account has negative equity - you are still responsible for the negative balance.

Then it all depends on your willingless to pay the debt, as well as the success of the firm in chasing you for your outstanding balance.

Quote from andysmith:


2) Are futures traders purposely keeping small accounts so that if a black swan event does occur, they lose their margin and no more? For example, say I have $5k in my account and am long 1 contract and ES drops 300 points (assume markets close, can't liquidate,...). The $5k in the account covers a 100 drop for the 1 contract I own, but who pays the other $10k (200*50)? Who is liable for that?