Trading Futures, Part 2 - Managing Size & Risk
There is flexibility trading futures as long as you follow the few basic rules.
Whether you are trading stocks, options, or futures there seems to be a few standard rules to live by.
One of them is, size matters.
Directly related to this is the need to always manage your risk.
This means understanding what you can lose before you think about what you can gain.
I mentioned the draw down limits for the trading combine that I am in to become a funded futures trader. These limits force you to put a lot of attention on your trade sizing and risk management.
I have to say, despite how difficult this makes the testing phase it really does seem to me like a sound way to filter the trader pool and select only the top talent.
You have a few options for trading futures once you get started and the decisions you make will have a big impact on your ability to ultimately get funded.
I am only one week into this new venture but am off to a good start and have a few things to share that will hopefully help you think about your trading and managing the risk you are taking on with each trade.
Bigs and Smalls
When you select your account size for starting with a futures prop firm, you might be tempted to make the selection based on price.
You might also be looking at the total account size and considering if $50k, $100k, or $150k makes the most sense.
Neither of these should be at the top of your list though.
The most important part of account selection is the maximum and daily draw down limits.
For example, I chose a $100,000 account size but every day the maximum I am allowed to lose before the account is frozen for the remainder of the day is only $2,000.
This means I really only have $2,000 at the start of every day. No more, no less. Regardless of how big or small the account size is, your maximum daily draw down is really the amount you are trading with.
There are different options when selecting your account that pertain to the “type” of account you are selecting.
I am using the “end of day” drawdown limits which is where you are given a max drawdown for the day. There are other evaluations that I won’t get into here, but they include having trailing drawdown limits or single step evaluations.
Definitely take some time to see which makes the most sense for you.
Regardless of which firm or account type you choose, I guarantee there will be one consistency across all of them.
Sizing and risk management will be incredibly important.
The good news is, you have all of the tools necessary to get it done!
That is because you have the option to trade different futures contracts (NQ, ES, CL, etc.) and you have different sizes in the form of minis and micros.
“Bigs” is what you might here the mini futures contracts referred to. For the S&P 500 E-mini contract (ES), each point move represents a $50 gain or loss.
Think about this for a second. A half percentage move for the S&P 500 futures, which is not a crazy day, can move about 25 points or $1,250 for a single contract.
Remember, that is in either direction. You should be thinking first about how you can lose that much not about how great it would be to gain that much on a $50 trade.
This is why stop losses are so important! But more on that later.
Given that I am only given $2,000 to work with, trading even just two contracts of the “bigs” requires incredibly tight and honest risk management.
There is no room to take a lazy approach to a $100 position that can quickly turn into a -$2,500 hit on just a half percent move for the index.
Honestly, there is no room for any laziness if you want trading to be your primary source of income.
Which brings me to the “smalls”, which are the S&P 500 Micro E-mini futures (MES).
These micro contracts move $5 for every point gain or loss which allows you to take on more contracts at a time with less risk.
Why would you want to do that?
Scaling in and out of your positions is one of the best ways to manage risk. This means buying in bites, not one single buy order, and selling in steps instead of closing out the entire position in one trade.
You can take 10 micro contracts if you are looking to trade a single ES contract and you will be in the same effective trade but with the added flexibility of selling part of your position while staying in the trade for more gains.
Micro contracts also allow you to take a smaller overall position. The $2,000 maximum daily drawdown limit is a very tight window for a vehicle that moves as fast as futures contracts can and do.
Which reminds me of one additional point. Trading the NQ, or E-mini NASDAQ-100 futures (or micros) is an option in addition to trading ES and other futures contracts.
NQ moves much faster than ES does, which is another thing to consider. I am personally starting out with the slower ES until I get a better feel for it.
I am 25% of the way to funded and excited to see where this goes!
Have a great day trading and let me know if you are thinking about trading futures.
So far, so good.
-Nate
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