What's the most I can lose?

[winter]

I trade NQ with stops at all times. Let's say 5 NQ contracts with a max of 5 pt stop. Mentally I'm treating this as a $500 max loss for any single trade however I am aware that there is nothing that would prevent the market from gapping through my stop without my stop loss order being executed, for instance a major terrorist attack or some other really bad news.

So my question is this, how do traders prepare or plan for such a worst-case scenario? It doesn't sound like my losses are bounded by any real amount - how does a prudent money management plan take a "once per decade event" into account?

 

[FredBloggs]

Q Whats the most I can lose?

A All of it.

 

[winter]

Quote from FredBloggs:

Q Whats the most I can lose?

A All of it.

Funny but not too helpful unless you define what "all" is. Since futures trading is on margin. Theoritically if NQ went to zero I'd be liable for around $140,000 on a 5 contract position.

I was hoping that folks that were trading during one of these "events" would chime in, maybe I should try to search back for posts from the 9/11 timeframe...

 

[bufferman]

Q: What's the most I can lose?
A: All you have + a few million (depending on your broker). Lastly, your life (depending on your psychological make-up).

 

[winter]

Quote from bufferman:

Q: What's the most I can lose?
A: All you have + a few million (depending on your broker). Lastly, your life (depending on your psychological make-up).

Really, on a 5 contract NQ trade? Do tell....

 

[abogdan]

Quote from winter:

Really, on a 5 contract NQ trade? Do tell....

Good that you are concerned about your possible losses before you consider your possible winnings! Good for you! Most of us (including me) did not asked this question and got burned!
Bad thing is that it looks to me that you still don't understand the mechanics of the market i.e. you seems to believe that your stop loss order will necessarily be filled. BIG MISTAKE! Please read more about the mechanics of GLOBEX and other exchanges before you trade. Please understand the stops and how they work!
Cheers,

 

[ArchAngel]

For simplicity, assume you're long your 5 contracts. If the market suffered a 100 point gap down due to an "event" - you can easily do the math. With market breakers, if the event was bad enough it could be days/weeks before you were able to exit (possibly even lower).

So how much could you lose? Use 9/11 as an example, you go from 1365 on 9/10 and end up about 110 points lower when markets reopen about a week later. But it's possible you don't get filled for another several days until near the bottom of the swing at call it -400 points.

Double that for your worst case, hell on earth scenario and it's conceivable you could end up down a net 4000 points on your 5 contracts = $80K.

If you think the potential is high enough or you need peace of mind - look into using far out of the money options as disaster insurance - pick a strike that's cheap and at the maximum level you're willing to risk.

 

[winter]

Quote from abogdan:

Good that you are concerned about your possible losses before you consider your possible winnings! Good for you! Most of us (including me) did not asked this question and got burned!
Bad thing is that it looks to me that you still don't understand the mechanics of the market i.e. you seems to believe that your stop loss order will necessarily be filled. BIG MISTAKE! Please read more about the mechanics of GLOBEX and other exchanges before you trade. Please understand the stops and how they work!
Cheers,

Thanks for the well wishes but I'm not sure how you gathered that I think my stop loss will be filled in extreme cases (I don't). I thought I was pretty clear in my initial post in this thread:

however I am aware that there is nothing that would prevent the market from gapping through my stop without my stop loss order being executed

So again I ask the question, how do real individual traders protect themselves against potentially disasterous losses? Is everyone just hoping that they don't happen to be in the market when it happens next (or that they are short and not long)?

 

[winter]

Quote from ArchAngel:

For simplicity, assume you're long your 5 contracts. If the market suffered a 100 point gap down due to an "event" - you can easily do the math. With market breakers, if the event was bad enough it could be days/weeks before you were able to exit (possibly even lower).

So how much could you lose? Use 9/11 as an example, you go from 1365 on 9/10 and end up about 110 points lower when markets reopen about a week later. But it's possible you don't get filled for another several days until near the bottom of the swing at call it -400 points.

Double that for your worst case, hell on earth scenario and it's conceivable you could end up down a net 4000 points on your 5 contracts = $80K.

If you think the potential is high enough or you need peace of mind - look into using far out of the money options as disaster insurance - pick a strike that's cheap and at the maximum level you're willing to risk.

Thanks - thats what I was looking for and far out of the money options make sense - but do real individual traders really do this? Maintaining a hedge option position would eat into profits, I guess one posibility is only taking short positions when trading since the odds of a positive event of equal magnitude seem very unlikely (cure for cancer? new unlimited fuel source discovered - anything I could think of would be not believe immediately anyway)

I don't think a repeat of a 9/11 style event is really that unlikely (meaning I think the odds are reasonable that another major attack will occur within the US in next 10 years)

I'm just trying to figure out how to do some position sizing for daytrading not just based on my trading account size but on the total risk it presents to me.

 

[abogdan]

Quote from winter:

Thanks for the well wishes but I'm not sure how you gathered that I think my stop loss will be filled in extreme cases (I don't). I thought I was pretty clear in my initial post in this thread:

So again I ask the question, how do real individual traders protect themselves against potentially disasterous losses? Is everyone just hoping that they don't happen to be in the market when it happens next (or that they are short and not long)?

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