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6 Uncommon Risk Management Tips for Futures Trading

August 4, 2010 by Brian Cullen| Tips & Strategies

In this article, I’ll discuss six risk management methods investors may not normally consider but should be actively practicing while trading in the futures market. Properly managing one’s risk may not reap bountiful profits in and of itself, but in my experience, it ensures that your short-term trading doesn’t result in short-term involvement in the markets.

1. Be Realistic

  • Know the size of your trading account.
  • Understand how leverage can affect it.
  • Ensure you are appropriately margined given your risk tolerance.

2. Utilize Your Futures Broker

Talk straight with your futures broker and discuss you’re your goals for risk management upfront. Ask your broker what amount of leverage is appropriate for you given your risk tolerance and account size. Discuss your trading style and ideas for minimizing risk through relevant trading strategies.

Hand Stopping Dominoes from Falling

By talking candidly and developing an open, trusting relationship, you can ensure your broker has a clear understanding of your needs and expectations in regard to risk. This will allow your broker to better serve as your trading advocate. Having this additional set of eyes – no less a professional’s eyes – watching your account can go a long way to helping you manage risk and achieve your futures trading goals.

3. Address Risk Upfront

Managing risk should begin before a trade is even made. Questions should be abundant prior to entering the market. On the contrary, there should be very few questions once a position is established. By addressing risk early in the trading stage, you leave nothing to chance when emotions run high.

3. Understand The Markets You Are Trading

It is important to realize that some markets are not for everyone and being involved in highly volatile markets requires proper capitalization and a definite discipline. Understand the effect of adverse price action and how it would translate to your account balance. This fundamental understanding needs to be addressed before trading in a particular market.

No matter where you get a trading idea, whether it is speaking to your futures broker or forming an opinion on your own, it is important to understand the market being considered. Understanding why the market is where it is, what the market’s typical trading range is and what important events are on the horizon (i.e. upcoming report numbers, news stories or any other pertinent fundamental/technical information) could provide crucial insight in regard to the timing of certain trades and the amount of margin that may be appropriate given your objective. Again, utilize your futures broker to assist you in this area.

Ready to think like a technical trader? Download our free guide to learn how to  identify chart formations and take action when the time is right.

4. Trade Within Your Comfort Zone

Simply put, do not overtrade. It is not necessary to take full advantage of reduced margins in the futures market. Having multiple positions on in the same market should be a trading style reserved for traders with enough capital in their accounts to back such a stance. In my opinion, keeping your margin to equity ratio at or below 40% is a good rule of thumb for maintaining proper leverage. Be sure to consciously remember that as much as profits appreciate with multiple contracts on, the losses accrue on the same scale.

5. Refrain From Too Much Diversification

While diversification is generally a good thing, it is also important to realize that you can be too “diversified”. Having positions on in many different market sectors can be detrimental if the entire market is experiencing a broad spectrum bullish or bearish tilt, as you could be on the wrong side of many markets all at the same time.

6. Using Risk Management to Stay in the Markets

Success is not always measured by profit size alone. It is also highly dependant on proper money management. Capital preservation and proper risk management is the key to remaining present in the markets.

By no means are the ideas I have put before you the only things to be considered when managing risk. But I will say, in all the years I have serviced clients and their accounts, these ideas are some of the least considered, yet most valuable.

Ready to think like a technical trader? Download our free guide to learn how to  identify chart formations and take action when the time is right.

Filed Under: Tips & Strategies

About Brian Cullen

Brian’s career began working with equities and equity options at Charles Schwab. Since then he has held various positions within the financial industry, from head clerk on a high volume trading desk on the floor of the CBOE, to being a “market maker” for a proprietary trading firm in the SPX and OEX pits. Brian then branched off to expand his horizons and transitioned into the futures market as a retail broker. He was a Market Strategist for Lind-Waldock’s Private Client Group division, dealing exclusively in the commodity markets.

Brian joined Daniels Trading in early 2009 to expand his added value services as a broker, and to build his client base in new areas. With Daniels Trading’s diversified execution categories, the opportunities for Brian’s clients are endless.

Brian’s goal is to work with his clients to focus on one main principle: Staying true to the principles of successful trading.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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