Risk Management in Futures Trading

What is the risk? Risk is a process in which, in order to get what we want, we perform actions that can lead to the loss of some of what is our or ours.

Applicable to trading futures on the Stock Exchange, this is how much cash we are willing to lose in an unfavorable outcome, in order to profit in a percentage.

How to minimize risk by trading a highly risky instrument - futures. There is a wealth of literature on capital management and minimizing trade risks. For myself, I distinguish such elements:

• Value of the stop order;
• Amount of risk-profit;
• The amount of entry from the value of the deposit;
• The amount of losses per day.

The value of the stop order.

I enter into the transaction only in the event that I can set a stop of 1-4% of the contract guarantee . In very rare cases, this is 5%, but I strive for positions with a stop 1.5 - 2.5%. And now the most important thing is that I do not stupidly stop my interest without looking at the situation, but I'm looking for inputs to the deal where such a stop would be appropriate.

Example: guarantee support for 1 futures contract for Gazprom shares (GAZR) - 1500 rubles. I enter the transaction if I see that I can place a stop order in the calculation of 1- 4% (15 - 60 rubles). Turn this stop is quite acceptable, and it's not worth the risk of trading intraday.

The value of risk is profit.

An important indicator in risk management is the amount of risk to profit. What is meant? When we enter a trading position (buy or sell futures), we must firstly understand how much we will lose if the outcome is unfavorable for us (the price goes not to our side), but most importantly - how much we will earn minimum when moving in our direction.

We certainly will not know when (not who does not know it) how much the price will pass the points, but we know the levels at which the price unfolded in the past and this is our first benchmarks. In a positive way, we have to have a benchmark for ourselves, where we will exit the position (close the deal) and this should be a certain figure. Yes, the price may go further in our direction, but it may not go.

So we enter the position, put the stop and wait for the movement in our direction. So the value of our potential profit should be at least 2 times the size of our stop.

Example: we buy 1 futures contract for Gazprom shares (GAZR) at a price of 1500 rubles (guarantee). We set the stop 30 rubles. (2% of the collateral) is the value of our risk, and we should expect a profit of at least 60 rubles, that is, to sell the contract for 1560 rubles. Our risk to profit ratio is 1: 2.

Ideally, one should strive for a risk-profit ratio of 1: 3 or more. I sometimes go into a deal with a ratio of 1: 1, but that in rare cases, try to enter at least at 1: 2.

The amount of the input from the value of the deposit.

It means that you can not enter the entire amount in your account in one transaction. Why? Because you must have a supply of funds in your account, in case the price does not immediately go to your side. You have to sit out the price deflection in the opposite direction, if you do not have enough money on your account, there will come a sad event called margin call (margin requirement), if you do not deposit additional funds, your position will be forcibly closed.

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