What is your ES/NQ/YM leverage

The black swan is a worrisome part of trading and using high leverage, I guess now more than ever for swing traders like myself who hold positions over night and over the weekends. San Francisco earth quake is one, an attack on one of the nuclear plants, for example Indian River point, just 30 miles north NYC is another...

That is why the old timers in mkt wizard books always talk of diversification, if stock index futures are crashing maybe the price for live cattle will take off, and crude oil will sky rocket... (of course it helps if you just happen to long those two !)
 
Quote from OldTrader:



A "REAL" disaster may be going to take you out, but it will not be taking me out. You know, I've been around quite a number of years at this point. I've seen alot of guys carried out. Almost always it's due to overtrading and overleverage. And the guys who make the big dough through overtrading and overleverage, almost always lose it to the same. In other words, it's a bad habit that gets you in the end.

My suggestion is that if there is something that is going to 'take you out', that you rethink your trading plan so that it won't be able to 'take you out'.

OldTrader
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As always OT, so well put.
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Pabst
Elite Member

Registered: Dec 2001
Posts: 1031


09-01-03 08:01 PM

Risk is in the eye of the beholder. I am a notorious over-trader. But one statement I would like to make is: the more capital you have, the more you should decrease your percentage risk on a trade or position. If you only have several grand, you'd might as well try to shoot out the lights. Afterall you can always earn at a job, or borrow a few thousand bucks to get back in the game. However as your money increases be mindful that 6 figures is hard to come by. So while I may tell someone with 5k to not hesitate risking 20% on a play they like, I think on 100k that 3% on a trade is enough rope. It's easier to turn 5k into a 100k then it is 100k into 2 million. It's the same percentage growth but a much different dynamic. As your equity curve increases let your relative position sizing decrease. I only wish that those times when I had made several hundred grand fast, I had pondered this with the same perspective that going broke gives one after the fact.
 
You obviously have a different perspective based on longer experience trading index futures than I have. Could you please comment on how you would size a futures account? This is a subject over which I have agonized much. Given that in a disaster you're liable for the losses regardless of your account size, I have rationalized that the issue is selecting the size needed to still be in the game when the ball comes back into play. Best regards.
 
A lot of this is so dependent on the time frame you are trading.

But for trading intraday, my absolute minimum is $6300/ES contract and that's only if I'm going balls to the wall, max position size, which rarely happens.

I get this number based on the overnight margin of the ES plus the overnight margin of the YM in case I have to hedge.... like I did on May 1 when Globex went down but A/C/E did not.

Shreddog
 
Quote from hypostomus:

You obviously have a different perspective based on longer experience trading index futures than I have. Could you please comment on how you would size a futures account? This is a subject over which I have agonized much. Given that in a disaster you're liable for the losses regardless of your account size, I have rationalized that the issue is selecting the size needed to still be in the game when the ball comes back into play. Best regards.
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This is a difficult question for me. I don't use alot of leverage. But I do vary my position size...every trade is not the same. If I have high confidence in my 'read' of the market, I tend to trade more, especially if I'm trading with some of 'their money' for the month. I trade small if less confidence, or at the beginning of a month.

But the one place I never want to be is a concept that you touched on....if the worst happens, am I still in a position to come back? I think that's the bottom line.

For a young guy I like the idea of $10K per contract. A 4-5 point stop risks 2-2.5% of your account. A disaster is going to leave you plenty of dough to continue the game. And as the poster above said, you have ample funds to hedge if you need to.

Now this doesn't put your pedal to the metal. But if I were you, I wouldn't worry too much about your gains, I'd worry more about risk, staying in the game, worst case scenarios. This game has huge potential, even with small positions. Gains will take care of themselves, but you gotta be in the game.

If you overtrade your account, you're going to have to shrink your stops, thus exposing yourself to market 'noise' rather than anything of real meaning, and therefore reducing the possiblility of larger gains.

I ususally tell people to trade smaller. If you're successful, you can trade bigger when the account is bigger. You can trade bigger on 'their' money.

OldTrader
 
...thank you kindly for your thoughtful response. Your recommendation of $10K per contract I assume applies to ES, so that the equivalent in NQ would be about $6K. Re stops and percentage of account risked, I use the backtested (and realized) drawdown as a measure of risk. Do you have an opinion about that approach as opposed to using a risk of ruin approach (which is what I assume was guiding your 2-2.5% recommendation)? BTW, I may very well be older than you, just not as savvy. Best regards. - Mike
 
Quote from hypostomus:

...thank you kindly for your thoughtful response. Your recommendation of $10K per contract I assume applies to ES, so that the equivalent in NQ would be about $6K. Re stops and percentage of account risked, I use the backtested (and realized) drawdown as a measure of risk. Do you have an opinion about that approach as opposed to using a risk of ruin approach (which is what I assume was guiding your 2-2.5% recommendation)? BTW, I may very well be older than you, just not as savvy. Best regards. - Mike
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I thought I was older than dirt! Just not older than you huh?

Yes, the 10K per contract applies to the ES. Now whether $6K is appropriate for NQ is another matter. It looks like you just sized down the amount based on contract size. But in my opinion, you overlooked the fact that the NQ is more volatile. I don't trade the NQ much, so I can't be of alot of help there, but my inclination would be to not change the amount per contract...certainly I wouldn't change it to $6K.

When I used the term 'young guy', I was using it in the sense that my impression is that young traders can and will assume more risk. If you are truly older than me (I'm 58), I would become more conservative in terms of margin per contract, not less. That's just me.

Here's an example though: I happen to use 10 point stops. Now granted, it's more of a 'fail-safe' stop, not one that I intend to get triggered on. Chances are if I'm wrong on the market, I'll get out sooner than that 10 points. That said though, if I want the 10 points to be no more than 1% of my account, then I need to have $50K per contract as my margin. 2% would make it $25K. In my case, I hold other investments than futures contracts in my account, so I'm not necessarily talking about "cash" per contract, I'm referring to "equity" per contract. Alot depends on the size and type of account you have.

My opinion is that most people would be much better off using far less leverage. Because what the leverage drives you to do is to use stops that are much too small. Further, the implication is that many high reward types of trades are not doable. And finally, holding a position overnight is completely out of the question because the risk is certainly going to be higher than a couple of points...which is the average stop size I see here.

To arrive at a specific amount I would start with my typical stop loss, and then work backwards. Sounds like you've got some sophisticated tools to use to do that. But if you're a guy who holds overnight, then you need to understand that the risk (and reward) goes up.

OldTrader
 
...I used to refer to EliteTrader in posts elsewhere as oxymoronic. Now I must humbly concede my error. Thanks again for elaborating on your trading philosophy. However, from my perspective $3K leveraged up in 1 NQ for 30-45 minutes in the morning is a lot safer than $28K in cash left overnight in 800 QQQ's, or worse, in an index fund. Just in case I am wrong I am only trading 2 contracts while I keep an eye out for that black swan.

Also I trade purely mechanically and think (hope?) I have a handle on the drawdown and the expected number of consecutive losses. The stop is set based on backtesting (12.5 NQ points), and it gives the trade so much room to breathe that, like yours, it is in effect a disaster stop.

If you were born after 29 March, you are a kid. Best regards.
 
Thanks to all those who voted and to those who participated in the discussion.

I agree that leverage maybe a function of your trading time frame. I believe it may also be a function of your age and appetite for risk. If someone is twenty something, with not too many responsibilities, I think they can probably tolerate a lot more risk. The thinking being, if they blowup they can always fall back and minimize their expenses, live with roommates, even move back with their parents. Get another trading stake together and start over.

However if you're thrifty/forty something or older with a wife (first or second :) ) and kids then your perspective of risk taking is totally different. I believe then we are more concerned with preservation of capital than making that extra few thousand...
 
and I recognize the voice of experience and appreciate it.

I use 15K per and as far as I am concerned it is all overnight as when I get in I can't be sure how long I will be in the trade. Minutes or days.
 
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