Practical Guidelines For Money Management In Futures Trading -

There is a saying from Sir Alex Ferguson, the legendary football manager: “Attack may win you games, but defense wins you championships.” If we compare this to trading, it means that to survive in the investment market for the long term, focusing more on money management than maximising profits is necessary.

Here are some practical guidelines for money management which are crucial in futures trading.

Warn yourself if you are over-positioned

In Futures trading, you can choose how much of your portfolio you want to allocate to trading or how much margin you want to use. Even though placing a high percentage of your portfolio in trades, such as more than 50%, may result in higher potential profits, it is important to remember that it also increases the chances of incurring significant losses and the risk of being forced to close or liquidate positions. Therefore, the margin allocated for each trade should not exceed 50% of your total portfolio to withstand market fluctuations.

Remind yourself to avoid excessive leverage.

Choosing higher leverage levels can potentially generate higher returns if you make the right trading decisions and use reduced margin. However, excessive leverage can lead to significant portfolio volatility and the possibility of being forced to close or liquidate your positions. Therefore, the appropriate leverage level for futures trading should not exceed a 20x ratio.

The more substantial the loss, the smaller the chance of a profit recovery

Most futures trading platforms allow you to choose perpetual contracts with no expiration date. This means that even if there is a significant loss, but it has not reached the point of being forced to liquidate, you can still hold onto the position.

For example, if you experience a 10% loss, you would need a 11.1% gain to recover. However, if you incur a 20% loss, you would need a 25% gain for your portfolio to return to profitability. If the loss reaches 75% of your portfolio, you would need the position to generate a return of over 300% to bring your portfolio back to its initial capital.

Nevertheless, it is important to remember that the more substantial the losses, the smaller the chance of a profit recovery.

The first lesson that futures traders need to learn is not about profit-making strategies but about protecting the capital in their portfolios. By safeguarding their funds, traders can create opportunities for profit when the odds are against them.

Post Views: 505