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I'm sorry. My example created some confusion.
I was talking about trading the same underlying in each account
in order to illustrate the increased risk associated with leverage. I meant
everything else equal in each account. After that, I referred to
futures as leveraged and stocks as non-leveraged so that it appeared that I
meant the leveraged account had futures in it and the other stocks.
That's not what I meant as that would be comparing apples to
oranges.
I don't worry about the leverage per
say, either. But I do worry about the margin requirements, which is
related to leverage, and the point value of the market. This why I don't trade
the SP500, margin to big and I can't stomach 250 bucks a point. At
least not yet and I only trade EOD at this point. My risk is also predetermined and I always trade
with stops.
I haven't seen any futures contract lose 95% of its
value in one day either. This could be rather deceiving in that if it did
happen, maybe that particular contract no longer exits so that we can't see that
it happened. I only have data for actively traded contracts, not the ones that
have disappeared for what ever reason. If it hasn't ever happened, I'd
really like to know why? There must be some fundamental reason why. I don't know
if this is related, but one thing I've noticed in my own research is that
generally speaking, commodities and futures tend to make more money on the long
side than the short side over the long term. I've only tested US
markets where everything is measured in dollars so it seems rather logical that
maybe inflation plays a role in this. Anyone have any ideas?
I'm still bitter about lumber and it wasn't nearly as bad
as Bre-X. By the way, I'm glad to see the increase in activity on this list.
It's been kind of quiet lately.
Best
Regards,
Trey
Yes, I'm
afraid your math is wrong as you're comparing apples to oranges. You're trying
to equate a fully invested stock account with a fully utilized (not sure
that anyone 'invests' in futures) futures account. Won't happen - at
least not with anyone who's been trading for more than a few months. The fact
that futures are highly leveraged doesn't necessarily imply more risk. Whether
it's stocks (far too risky for me) or futures, I risk a specific $ amount and
look for a specific reward. I don't care whether the leverage is a million to
1. My risk is pre-determined. Yes, I think that some commodities are more
risky than others, but that's a function of the commodity itself, not the fact
that it's a future.
Having
said all that, I still haven't seen any futures contract lose 95% of its value
overnight and, yes, I'm still bitter over Bre-X.
Andrew
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
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