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Scaling in and out can improve returns dramatically, however I believe
that account size and stop placement are the most important determinent
of what one should be trading in the spoo. Many experienced traders
believe that risk per trade should be limited to 2.5% of account size.
The daily range in the spoo is roughly 30 points. If one is placing
stops at 3 times daily range, as many system traders do, one should have
account of ($30 * 50 * 3 / .025) or $180,000 per emini and $900,000 per
big contract. A trader who is able to manage risk to 10 points per
contract via stops or hedging would need account of ($10 * 50 / .025) or
$20,000 per emini. A trader who is able to manage risk to 2 points would
need account of $4000. In all cases, except the later, the account size
which should be used is far in excess of the roughly $7000 margin per
emini required by many brokers. Also, one must allow for the fact that
placement of a stop does not guarantee a fill at the stop - one of the
excellent reasons for managing risk as a low percentage of account size.
Puts for long trades and calls for short trades can be used in lieu of
stops to improve risk control and eliminate slippage, however there is
an up-front cost in purchasing the put or call. The limitations imposed
risk control per trade (e.g. 2.5% per trade) is one of the reasons why
many experienced futures traders trade more than one commodity and/or
hedge established positions before putting on new trades.
Earl
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