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