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Hello
Andrew,
You mean there's another reason that driving is
risky? Isn't that why people buy car insurance? Futures trading is
most certainly riskier than stocks, theoretically. First, futures trading
is a zero sum game. Secondly, futures have expiration dates. You never have
to worry about taking delivery of live cattle when trading stocks. Thirdly, it's
a mathematical fact that leverage increases risk. If you have an account fully
invested at a leverage of 10 to 1, then a 10% move against you in the underlying
wipes you out. They same account trading with no leverage would require a 100%
move against you to wipe you out. From a probability standpoint, which is more
likely to happen, a 10% move or a 100% move? Please correct me if I'm wrong with
my math here as certainly wouldn't be the first time. Of
course, someone trading the leveraged account would compensate for
the increased risk by trading fewer contracts. In stocks, most
people don't trade with leverage. If they do, it's by choice. Plus, they
must get approval and there are limits to the amount of margin. However, in
futures everyone is leveraged. Therefore, futures trading, from a leverage
stand point is most certainly more risky than non-leveraged stock
trading. As you pointed out, there are measures one can take to
limit the risk: position sizing, stops, spreads, options, close trade prior
to delivery, etc. Risk management is key.
Back to the original question. One thing I do for any
market I trade is go back through the entire history and measure the
following.
1. Series of runs. That is, how many times
has the market gone up/down X number of days/weeks/months in a row.
Starting at 1 up to the maximum.
2. The maximum move up/dn in a day, week,
month. Do this as a percentage and in dollars.
3. For markets with daily
limits, measure the number of limit moves and then measure how many
times the market has made limit moves in row up/dn. What was
the dollar value the percentage move each
time.
Use
all these values and measures as risk proxies, keeping in mind that those
extreme, rare values most certainly will be exceeded at some point in the
future. Make sure you and your account can handles these possibilities. I hope
this helps.
Trey
No, I can't agree with the blanket
statement that trading futures is very risky. It's like saying that driving is
very risky because you might have an accident. As long as you drive ( and
trade) defensively, the risk is minimal. Personally, I find stocks to be much
more volatile and risky. I speak from experience - just try getting out of
Bre-X when it crashes overnight from $45 to $2. That was the last stock I ever
bought.
As long as you choose your markets
carefully and employ good money management, then futures can be no worse than
an average risk. Personally, I stick to the indexes where I've whittled my
risk down over the years to a couple of ticks per contract in the minis.
Now that's not a lot of risk and, yes, I do occasionally get slippage of a
tick in fast markets. It seems like years since there was a limit down in the
spoos. I can't recall one since they doubled the daily limits a few years
ago..
My point is that futures are only as
risky as you make them.
Andrew
----- Original Message -----
Sent: Thursday, November 18, 2004 3:38
PM
Subject: RE: [RT] Commodities,
especially live cattle
Unfortunately, no markets are immune to these types of extreme
events. Taleb refers to them as 'black swans'. They're much more common than
most people and statistics assume and totally unpredictable. I'm
not 'in the know', but I think it comes with the territory. Trading futures
is very risky because of the leverage. At least cattle has a daily limit, so
you know you can't lose more than that in a day;) Although you might not be
able to get out and suffer even more limit moves against your position.
Personally, I don't trade markets with limit moves because I always want the
option of being able to get out if I want. I got trapped in lumber once and
I've never traded another market with daily limits again. I hated feeling
totally helpless, sitting there hoping that the market will come back just
so I can get out. It was awful. It wasn't even a lot of money, but I don't
ever want to feel that way again. Trading is risky enough, why add to it by
getting into market where you might not be able to get out. Plus, I think
those limits are like magnets. They're like sitting targets and those
markets want to test them. In your situation, you could hedge with an
option. But, do they stop cattle option trading during limit moves? Other
ideas: trade less size, trade other markets in addition to cattle to
diversify. I hope this helps.
Trey
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