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3 Futures Risks To Watch Out For

October 30, 2018 by Daniels Trading| Futures 101

Risk is defined as “a situation involving exposure to danger.” In the arena of active trading, it’s an unavoidable aspect of doing business ― a trader or hedger places capital in harm’s way with the hopes of realizing financial gain.

Gone unchecked, risk can be a monster. When put into the proper context, risk becomes manageable. If you are going to engage the derivatives markets, there are three futures risks to be especially aware of:

  • Volatility
  • The human element
  • Fraud

The futures markets have earned a reputation for being particularly unforgiving venues. Tales of high-frequency traders and fraudulent practices “tilting the playing field” litter the internet. Many financial periodicals of note have deemed futures day trading to be a fool’s errand. Stories and anecdotal evidence of this ilk boil down to one thing: risk.

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Periodic Volatility

Of all futures risks, pricing volatility is truly unavoidable. Price action can vary wildly as market fundamentals, technicals, and breaking news items collide. Order flow drives volatility and can be unpredictable at best.

Holding an open position in any market puts a trader at the mercy of periodic volatility. However, a trader can take a few basic precautions to mitigate the negative impact of pricing volatility:

  • Study market tendencies: Simply put, know your market! Understand normal levels of volatility and liquidity, as well as times of enhanced participation.
  • Daily economic calendar: Each day’s economic calendar is readily available online from dozens of sources. Be aware of the times in which economic news, events, and reports are to become public.
  • Access to a news feed: Breaking news items are unpredictable and often shock markets. Having access to a real-time news feed can help you stay abreast of current events.

Understanding how a product regularly behaves, the schedule for fundamental market drivers, and staying up on the news can take much of the risk out of periodic volatility.

The Human Element

Roman philosopher Cicero wrote “man is his own worst enemy.” If you have ever taken an ill-advised trade or practiced haphazard money management, then your trading account is able to attest to the quote’s validity. The human element, specifically emotional trading, tops any list of futures risks.

Here are a few common pitfalls to which traders fall victim and tips on how to successfully manage their negative impact on profitability:

  • Physical errors: Regardless of experience level, mistakes happen. Botched order entry/exits cost money and must be minimized. Outside of complete automation, practice makes perfect. Be fluent and familiar with the functionality of your software trading platform.
  • Overtrading: Overtrading is a terrible habit, stemming from negative trade-related emotions. It inevitably leads to the compromise of any perceived edge in the markets. One way to avoid overtrading is to implement concrete rules for trade selection.
  • Reckless use of leverage: Increasing position size to cover a loss, adding to a losing position, or euphoric risk taking destroys profit in the long run. Again, adhering to steadfast guidelines pertaining to leverage is the key to effectively managing these issues.

Developing or adopting a comprehensive trading plan is a catch-all solution to many problems posed by the human psyche. Greed and fear are two formidable opponents to profitability ― a detailed plan can eliminate them from the equation.

Fraud

Outright fraud can be the most difficult of all futures risks to avoid. Cases of systemic fraud featuring both brokers and traders may be found in almost any market. Fortunately, U.S. futures markets fall under the jurisdiction of the Commodities Futures Trading Commission (CFTC). Operational oversight is extensive to preserve the integrity of the marketplace.

Nonetheless, there are several fraudulent activities to be aware of and steps to be taken to avoid falling victim to their malicious intent:

  • Trader fraud: Individual retail and institutional participants have been documented engaging in fraudulent trading activities. Spoofing, quote stuffing, and layering are a few examples.
  • Broker fraud: Unfortunately, not all brokers are on the up and up. However, the CFTC RED List and SmartCheck database can be used to verify that your broker is licensed and in good standing.

While gaining market experience is the only remedy for recognizing trader fraud in real-time, avoiding broker fraud is straightforward. Securing the services of a reputable and competent brokerage firm is the number-one way of guaranteeing your best shot at success.

Understanding Futures Risks Is a Key to Profitability

The futures markets are dynamic atmospheres ― what was fact yesterday may not necessarily be true today. Risk is an ever-evolving topic, and one that a trader must address on an ongoing basis.

For more information on the current risk profile of the futures markets, talk with a broker at Daniels Trading. Experience is the best teacher, and the team members at Daniels are veterans of the commodity, currency, and equities markets.

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Filed Under: Futures 101

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

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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