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I am studying futures trading, but am very naive. I've read a few things discussing the risks associated and how they make it easy to quickly loose a lot of money, but am trying to build a deeper knowledge of all the risks and how to control them.
My understanding is that he most notable risk comes from leverage and seeing large losses in a highly leveraged trade. Would having conservative stop losses on every trade completely mitigate this risk?
Beyond that, can you give me any information?
What risks are there?
What can be done to control them?
Can they be fully controlled?
Can you help answer these questions from other members on NexusFi?
I would like to suggest reading some good books on trading futures and options to learn about the basics. I like the books written by Carley Garner for beginners, but there are a lot of others.
Regarding your questions:
Yes, the most important risks are related to leverage. And you cannot fully mitigate them by placing a stop loss. There are large gaps in the charts, eg. over the weekend. There are futures, eg. some of the minis, which have a very low volume, thus, your stop might not be hit.
Regarding other risks, I refer to my first sentence.
The most important thing in trading is not making money. It is conserving your account.
Trading is gambling against an exchange with a very specific house edge. So learn this first. Once you understand the house edge, then your job is to figure out if you can find any bet that can mathematically produce a positive expectancy against this house edge.
The single biggest risk IMO is to not realize the nature of this fact.
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
Yeah, I suppose I should clarify the point a little so it doesn't come off as cryptic. But basically what I mean is that a trader has to overcome the inherint disadvantages that are presented by an extremely fast moving double sided auction.
1. The spread costs
2. Adverse selection / toxic fills
3. Slippage
4. Participation rates. I.E most of the order book related edges LOB or tape are extremely speed sensitive and if even if you can predict an event, you may not get to participate in the event.
Beyond just the exchange related house obsticals you have to overcome there are also:
1. Commissions.
2. Latencies
3. Exchange fees
So when you factor all these together you can think of this as a "house edge" you need to beat. Vegas will tell you the house edge on different games but in trading you get to make your own rules in terms of the bet and the money you put on the bet... But most traders are not aware of how this all builds into a bigger picture. So my remark is simply the biggest risk you can make is going into this blind and naive and not realizing the full complexity of what you are up against beyond just being able to predict something.
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
