Hello,
As a trader of many years, I do realize that even with the best methodology in live trading environment,
surprises usually come in a form of over leveraging the account by either “loading up” because of
the trader’s bias, or worse - the revenge trading or finally because of the systemic risks such as massive data feed outage, sudden and usually fully unpredictable market price swings (past the 2nd or 3rd standard deviation) and it all happens in a matter of minutes if not seconds. The continuous involvement of machines creates the “flash crushes” and hence puts us, the traders at odds beyond the nicely upwards sloping results of the backtested system results.
I always seem to consider the risks more carefully during the live demo testing or backtesting/optimizing (although over-optimization does not really work), I would wager a bet that if all retail traders were treated like prop traders and they requested to have certain max risk parameters imposed on their accounts (similar to Prop Firms rules), many of us would probably save ourselves the grief from “blowing up” countless accounts.
Hence my question:
Q: What RISK CONTROL options exist to limit the trader’s account exposure by either limiting their max POSITION SIZE, or MAX MARGIN USE or any other combination of hard coded risk metrics that could be imposed by the FCM or IB per trader’s request, so that we can help alleviate or mitigate some risks when we need it most, namely when markets are wild or we lose sight and grip on reality and get lost in the mix of emotions while the markets mercilessly literally suck the funds out of our accounts.
I would love to be able to have the ability to limit the exposure before one gets in the hot seat because after careful studying of all of my past trading results, I see that hard coded risk parameters would save me from a few mega losing trades and days.
The typical trader-side risk modules available via different platforms are too easily overridden by the trader and hence not sufficient enough to protect from potential disasters. Just my own experience.
I would love to know what risk protection modules are available with all of the FCM’s Optimus works with.
We like addressing questions that concern the size of futures trades, and general risk management.
There are no ways to eliminate risk in the market place, but futures traders can take specific measures to mitigate risk and reduce exposure during volatile periods and harsh market conditions. Before we go into the different modules of risk management, we should mention that not every futures trading platform will provide the same features for risk management. It is very specific to the trading software.
Margin-Based Trades. You primarily decide the percentage of the margin that you wish to apply to your account. A daytrader may want to reduce the initial margin to say 50% just for day trading. Please keep in mind that any traders MUST have the initial margin in the account if the position is carried to overnight. Having said that a trader could ask for 100% initial margin regardless of the period that he /she trades. Further, they may ask for 200% margin not to be tempted to trade large position relatively large to their account size.
Clip Size. This where a futures trader may ask to restrict his/her size when placing a single trade. For example, a trader may want to limit himself from putting a large position and instead just built a position. So let’s say you can state “no more than two ES per clip” which means that software may restrict you from placing more than two lots in one single trade.
Max Trade Size. A trader may wish to restrict himself from a total number of lots placed in a single futures contract. Let’s say no more than ten lots as the max size on the ES contract.
A few more points:
A trader who trades contacts like the ES Futures contract may wish to utilize tools like the VIX to decide how volatile the market is and decide the size of futures contracts according to that.
As a final note, I would say that we feel that the risk appetite by retail traders has grown substantially. You may notice that many of us advertise things such as “$500 day trading margins.” On the FCM size, they determine margin by the dollar value. You can also request such futures margins, but these are very low margins, and it may not be prudent to utilize such margins for all futures account sizes.
Thank you for your participation and contribution to the community support board. Please let us know if you have any questions or comments on our answer.
Matt,
Thanks for the inputs regarding the risk and size management options.
Re: Margin-Based trades.
This seems to be a good option not to overload on too many contracts
which with your FCM and your IB offering at $500 on the popular indices may quickly become a disaster. Creating 100% or even 200% for some traders to start with would be a nice way to go and create the smoothest possible transition from Demo to live trading.
Re: Clip Size
Let’s say a trade requested max 1 lot per opening trade to build say a max of 5 lot position.
Would clip size only restrict from opening new positions in the markets to only 1 lot, so that if a trade wants to close the total of 5 lots he/she built up, a trade can close the position of 5 lots and not be restricted by clip size of one. Asking just for clarity.
Max Trade Size.
This could be helpful if a trader would like to trade more then one instrument on the account.
A good basic feature.
One good idea to work and practice with the trading size is to trade a live account with a very conservative margin (100%+ of exchange margins) while trading side by side on DEMO with more size. I noticed that while trading live very small and demo larger one learns the lesson every other day that saves the day if not the account. It’s a good practice and I recommend it.
I will try to post another thread on DEMO trading vs LIVE TRADING to share some of my experiences.
I respect your point. Typically those who offer this kind of margins have very tight controls on risk management such as auto liquidations and the may restrict the number of contracts a trader may carry. However, if markets gap, a trader may face a deficit, so if futures traders utilize such margins it would be up to them to monitor it.
In liquidation, you can close all your open positions. It should not affect when you want to offset all positions. Also, you can request different clip sizes for different futures instruments.