[Reprinted with permission of Profit Buddies]
Risk Management is an activity we all engage in; from wearing our seatbelt to homeowners insurance, we’re trying to control some form of risk. But what about the risks associated with trading and investing? In this article we’re going to discuss a few key Risk Management techniques.
As mentioned above, Risk Management is an activity or activities we use to reduce or control some form of risk. In investing or trading, the simplest definition of risk is “losing money”. So what can we do to reduce our risk? There are many articles, studies, books, etc, covering nearly every aspect of Risk Management, but let’s limit our scope to traders.
- Never trade with money you need. “Money you need”? Is there such a thing as money we don’t need? Actually, yes… money you need includes money used to pay for essentials (food, clothing, and shelter), to pay bills, buy gas, money to save for emergencies and retirement, whatever you “need” to survive and thrive. Everything else is money you don’t “need”, usually described as “discretionary” or “disposable”. The risk we’re mitigating is not losing the money we “need” for more important purposes.
- Never risk all of your money on one position. As the old proverb states; “never place all of your eggs in one basket”, some very sage advice for a saying that has been around forever. The risk here is pretty simple… if you risk it all and lose; you’re out of the game. Even if you win… and win big… the next time you bet it all and lose, you’re out of the game. As a trader you will at some point hear the saying; “the longer you stay in the game, the better your chances of winning”, again, some very sage advice.
- Keep your position sizes reasonably equal. Doing this ensures that one position in your portfolio doesn’t overpower any other. If you have $100.00 and place 4 bets of $25.00 each, and one of those bets loses 25%, your portfolio will be down a total of only about 6%. If, on the other hand, you have $100.00 and place 3 bets of $20.00 and one bet of $40.00, and the $40.00 bet loses 25%, your portfolio will be down 10%… nearly double the total loss to your account!
- Diversify your positions. As with all investing and trading, diversification is a must. Much like the previous two bullets, diversifying protects us from catastrophic loss of our capital if, for example, some company were to go bankrupt. This subject is so crucial to our financial well-being, I plan on publishing a complete article on this subject in the near future.
- Account Allocation. Account allocation means how to allocate the funds in your portfolio, such as how much to allocate for trading and investing, how much to keep in reserve, how many positions to have open, etc. I’ll try to touch on each of these topics below;
– Allocation. Much like keeping some extra cash for emergencies in a savings account, or not running a checking account balance down to zero, it’s generally a good idea to not invest 100% of your trading funds. These extra funds could allow for unforeseen fees or commissions charged by a broker, minimum account limits, and such.
– Reserve. Reserve is the amount of trading funds kept aside for future investing use. These reserve funds are meant for new trade opportunities that may arise, and can also help fund new trades after taking a loss on a previous position.
– Number of Positions. There are two main ideas here; number of positions, and maximum number of positions.
— The number of positions open at any one time is a great way of controlling risk. As market conditions provide higher probabilities of success, more trades could be opened, if market conditions change, fewer open positions reduce your funds at risk.
— Knowing the maximum number of trades you may have open at any one time allows you to properly allocate your trading funds using the above activities. If you don’t know the maximum number of trades you will have open, it will be difficult to determine how much to allocate per trade, how much to keep in reserve, or even how much of your account is at risk at any one time.
- Fixed Fractional Allocation. Although I gave this item a bullet of its own, it’s really another method of Account Allocation. In this approach, a specific percentage of your trading capital is allocated to every new trade… say 25%. Using this approach, position allocations grow as your trading funds increase (after winning trades), and position allocations shrink as your trading funds decrease (after losing trades), all while keeping your position allocation at 25% of your trading funds. The intent of this approach is to play more dollars on the way up, yet keep investors/traders “in the game” longer by decreasing risk during losing streaks.
While we’ve covered a lot of information in this article, there is always more to learn about Risk Management; your job is to continue learning, continue earning, and try to apply some of the above concepts in your trading.
Discuss this article and other trading topics at Profit Buddies
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Investing in the index futures market is decidely volatile and liquid which makes it a field that discipline and internal control will ultimately decide if the trader is successful or not. The first step that a new trader should study is taking a look at their self or take an internal inventory. To enjoy futures market success, the trader must first build a system that is right for them and one that fits their personality.
In order to acquire a system like this, he must first take a inventory of himself and his skills: his personality or temperament, time constraints, available resources, weaknesses and strengths. Without first taking this personal inventory, the trader can never hope to develop a index futures trading methodology that is correct for them.
Important Considerations
How much money do they have on hand that can be used to trade and available for risk? Absence of funding is a source of major complications for rookies. If adequate funds are not accessible then suitable position sizing cannot be accomplished and this is a vital partpart of a successful trading system that goes largely ignored.
Does the trader have ample computer skills? If not, a computer class should be taken to develop computer competence. Losses are part of trading and unavoidable. How well does the trader tolerate and handle losses?
There are many important issues that the trader must take into account before entering the index futures markets. One important issue is time. If the trader has a full-time job during market hours it will be next to impossible for the trader to access the markets during the daily sessions. However, it is possible for the trader to employimplement an automated system that will buy and sell emini contracts automatically. However, this kind of system is usually reserved for the trader that is experienced and already has the required skills to be successful with this type of trading system.
The trader’s goals when trading the emini market is another very important part of the market. The trader cannot create a successful trading system for making money in the futures markets unless he first grasps what he is wishing to accomplish. Determining his objectives and having them clearly in his mind should be major task in developing a system with almost half the time spent designing the system.
Determining how aggresive the trader wishes to be in the market is another very important part of becoming successful. Does the trader have a long term position that involves holding futuresindex futures contracts for an extended period of time or does the trader wish to use the swing trading or day trading form of emini index futures trading, where the time periods are much shorter than the long term form of trading?
As you can observe from the brief summary above, there are very many different aspects of index futures trading that must be measured before ever approaching the market. Taking a self-inventory of your personality and available resources is the first step a new trader should take in system development and trading success.
Learn more about NASDAQ emini trading.
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Emini futures have experienced a boom in new market players since their beginning mainly because of their lower margin requirements which grants participants that don’t have unlimited funds to participate in the emini markets. Futures contracts are available to trade on all 3 major indexes including the S&P 500, NASDAQ and the DOW and widely utilized by traders for both day trading and scalp trading.
The S&P emini is one-fifth the amount of the regular contract which makes it appealing to traders with lesser funded brokerage accounts. Since the emini futures market is fluid, volatility creates opportunities for participants to profit successfully everyday. Stagnant and sideways markets that so often are a part of the other markets is virtually non-existent in the emini contracts market. The New York mid-day lunch break is usually the only sluggish time during any given trading day since floor traders and other market participants break for lunch, with action quickly resuming once the lunch hour is over. Trading eminis is often at it’s best as the market moves toward the closing bell.
Some traders only are active the 1st hour to hour and half each morning session, taking their profits and doing whatever they wish for the rest of the day, while others will trade only during the first and last hours of the day. The opening and closing hours of the market day often see the most volatility and market moves, although many opportunities to profit are available throughout the day.
One of the most exciting features of the emini futures markets and what attracts traders is that market direction is not a concern. Traders can profit by entering trades both long or short and only care about being on the profitable side of the trade. Unlike stock trading, hours of research and chart scanning for possible stocks to trade is removed with emini index trading. Since the same emini will be traded each day, there is no need to look over hundreds of charts each evening.
Index futures trading offers an opportunity for traders to profit on volatility within the market on a daily basis. Although the futures market is influenced by financial news reports and geo-political events, the index contract trader can usually sit on the sidelines when market reports are scheduled to be released. Almost all financial reports have specified release times which allow the trader to plan his strategy around these reports. There is no need to worry about stock analyst downgrades or unexpected news events that are so common on the stock exchanges, which can adversely affect a trader’s positions. Emini futures trading removes some elements of market unpredictability.
Index futures trading is an exciting occupation. If the trader takes the necessary time to learn about the emini futures market and it’s dynamics, he can be successful. Having a trading system with sound money management rules in place is the most important tool needed to be successful. Once the trader has a system in place, he should experience success as a index futures trader.
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FOREX market are trading daily twenty-four hours a day and sometimes trading is completed on the weekend, but not all weekends.
You might be surprised at the number of people that are involved in FOREX trading. In the years 2004, almost two trillion dollars was an average daily trading volume. This is a huge number for the number of daily transactions to take place. Think about how much a trillion dollars really is and then times that by two, and this is the money that is changing hands every day!
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The FOREX market is not something new, but has been used for over thirty years. With the introduction of computers, and then the internet, the trading on the FOREX market continues to grow as more and more people and businesses alike become aware of the availablily of this trading market. FOREX only accounts for about ten percent of the total trading from country to country, but as the popularity in this market continues to grow so could that number.
FOREX trading is all about trading foreign currency, stocks, and similar type of products. The currency of one country is weighed against the currency of another country to determine value
Forex online currency trading actually works on the very basic principle of currency projections. You can make money by buying foreign currencies on a cheap rate and selling them at a higher one to make a profit.
Like if you can make a profit of 2 cents per Euro if you have bought it for1.52 USD per Euro and sold it at 1.52 USD per Euro.
Though this method of making money is popular among the moneychangers, traders and speculator also use it. Traders and speculators predict the market fluctuation and determine the currency projections from that fluctuation.
Suppose a speculator gets the currency projections that a particular currency will be in demand for the next few weeks.
He will buy a lot of that currency before the exchange rate increase and sale his reserve when he deems that the exchange rate is the highest to make a good profit.
This is how the right currency projections help them to make a lot of money. The method depends highly if not entirely on currency projections.
One can lose a lot of money in Forex currency market due to its unpredictable nature of not following the currency projections. There are other factors that play an important role other than currency projections like disposition of the head of state.
The market reaction to currency projections often varies. Miscalculating those signs to currency projections can result in losing a lot of money.
Short selling is where speculators often make mistakes. Short selling is selling currency that is not in the persons reserve but intends to get at a future date when the price is down by following the currency projections.
Especially during the onset of stock market crises and currency projections, short selling results in bankruptcy for a lot of people.
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