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How Can You Manage Risk When Trading Futures?

Trader Education Managing Director Joe Mazzola discusses how to address risk at the account, portfolio, and trade level.

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Because trading futures involves highly leveraged transactions, futures traders often cite managing risk as key to their long-term success.

 

So before you ever make a trade, develop a plan for risk management, and be sure to address your risks from the account, the portfolio and the trade level.

 

At the account level, keep a close eye on your “margin-to-equity” ratio.

 

To calculate yours, divide the total margin requirements for all of your open contracts by the total value in your account, otherwise known as your account equity.

 

For example, if your account is valued at $100,000 and the margin requirements on your open contracts are $30,000, then your margin-to-equity ratio is 30%. 

 

The higher your ratio; the higher your risk.

 

While there is no magic number, by keeping your margin-to-equity ratio below 30%, if your positions move against you’ll have a larger cushion available to help cover your margin limits before you have to meet margin calls or be sold out.

 

At the portfolio level, you’ll want to diversify your positions among markets where price movements aren’t correlated.

 

For example, soybeans, gold and crude oil typically trade independently of one another, while the 5-year, 10-year and 30-year treasury bonds tend to move in tandem.

 

As you diversify, make sure you fully understand how markets you are considering move, trade and correlate to the other positions in your portfolio.

 

Many traders choose to only risk a very small percent of their trading capital on any given trade.

 

This allows them to weather a string of sequential losses and still have sufficient capital to continue trading.

 

A good approach is to start small, develop your strategy and build confidence.

 

Additionally, using stop losses is a simple way to give yourself an opportunity to close out he contracts that turn against you before they negatively impact your ability to continue trading.

 

For additional information on trading, check out the Learning center on schwab.com.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

There is no guarantee that execution of a stop order will be at or near the stop price.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

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