Risk Management for Futures Trading

Risk Management is a critical factor for succeeding at futures trading. Some people believe that, regardless of where an entry and exit is made, if solid risk management is applied, then a trader can be successful.

Defining a risk management strategy can be as complicated as devising a trading system. There are “text book” scenarios, such as ‘never risk more than 5% of your equity on any single trade’. Some risk management systems specify an absolute dollar loss per trade, while other approaches specify a maximum dollar amount to risk for an entire day or week.

Risk Management is closely tied to stop placement. One of the most difficult aspects of futures trading is using stops loss orders that adhere to solid risk management principles while preventing those stop orders from being executed. Overcoming this problem may require refinements to trade entry timing.

Futures traders tend to place their stops at similar levels, such as above or below a significant high or low price; or above or below the current trading session’s high or low price. The inherent nature of this results in stop loss orders being executed and then the market mysteriously turns back in favor of the now-exited trade.

There are three primary challenges for futures traders related to risk management:

More will be discussed on this topic, as Risk Management is such a critical component to successful futures trading.