-----Original
Message-----
From: Trey Johnson
[mailto:dickjohnson3@xxxxxxxxxxxxxx]
Sent: Friday, November 19, 2004
9:42 AM
To: realtraders@xxxxxxxxxxxxxxx
Subject: RE: [RT] Commodities,
especially live cattle
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.
NW: Why do
you think futures are more risky than stocks? If you equalize the leverage, on
average, most commodities are less volatile than the average stock. Have you
ever seen a commodity lose 50% of its
value in one day or become worthless in a few days? I have seen many stocks do
that.
First, futures
trading is a zero sum game.
Stocks are
also a zero sum game.
Secondly, futures
have expiration dates. You never have to worry about taking delivery of live
cattle when trading stocks.
NW: Only
about 1% of all futures are ever used for delivery. This is a red herring argument.
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.
NW: You
are wrong. The leverage offered in futures is optional. No one is making you get
fully margined. Comparing futures to stocks by using the fully margined futures
example is like comparing apples to oranges.
If you want to make a fair comparison, use the same amount of margin for
each.
Remember,
the risk of loss for futures and stocks is substantial.
Regards,
Norm
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
-----Original Message-----
From: Andrew Nopper
[mailto:nopper@xxxxxxxxxx]
Sent: Thursday, November 18, 2004
8:48 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: Re: [RT] Commodities,
especially live cattle
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 -----
To: realtraders@xxxxxxxxxxxxxxx
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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