Commodity futures and options trading money management, risk and the logic of exchange, PART 3

Posted by tgpmaker in Feb 10, 2010, under risk managements

Perhaps the most important to get correct the market is to survive. This is the number one. Without the survival of the bad times we were without hope. Money and risk management subjects may seem boring, but read on to see how it can be exciting if you know the specific reasons and rationale for their use. You should never trade the same way again!

Option may purchase goods for raw beginners. Some see a pitch to hit TV is rich in gold and oil. Theyown account the entire invite my way out-of-the-money options, they lose all their equity trading, the erosion of the premium, and then the curse of the market. It does not take account of survival, they need to prepare for the inevitable consequence of loss in trading with 10% accuracy. We must survive long enough to be there when the option 10% win success. The remaining 90% will be only losers on the probability of the method used.

In this case, means the division of our commercial capital of at leasttwenty parties in the chain of losses which can survive the probability of certain way, over time. This is survival and to know what kind of trading of raw materials, we make sure that we can set the money risked on each trade. When we buy trading at 10% accuracy (option) and waiting to make money on the first 3-4 trades, it is pure arrogance.

Then there are some dealers, the goods will be positioned overhead option by purchasing an option to large and are willing toerode leave with a loss of 100% of the entire account. They have no intention to close if the market does not act properly. Not a good idea. Although some goods and buy an option to use its complete loss as stop-loss in itself. This is permissible only if with small objects. The sad thing is that when these guys get only double the price of option, called a great victory and set aside. Pure madness!

How can you be prepared to lose their investments, whileTime to take small profits, while trading at 10-20% accuracy? The results are predictable. You lose all the time. Their excuse is, the analysis is wrong, or on the commodity markets are poor or in any other profession, which should have been obtained. Suggested by the math on it, but it is not. No matter what they do, the result remains the same, unless you change your money management are made. Among other issues, a definition of madness, for the same purpose beyond expectationsdifferent results. (smile)

The bottom line is that if your method of trading commodity generates an average of 20% (at best), the precision of design, as an option on my way out-of-the-money is often, should be better, because the average earnings four times larger than your average loss. And this is just to break even, not counting commissions, bid-ask spreads and below! This means that if you think that a loss of $ 2,000 is a good idea, it is better from an average of $ 8000 profit, break even. Just to breakeven!

You need your hands in your lap and let profits run options when purchasing. This is for the long haul routes, where things are still in course of time. In the short term you can trade better or worse, but over time will be more likely when you spend your time more. With an account of $ 10,000 when it was $ 2000 and $ 2000 in lost revenue while trading at 20% correct, we expect to be out of commodity businesses, in less than ten trades. This may seem a fiction, but believe me, manyNewcomers to do just that, I think will win in the end.

Part four of the five parties Avanti

There is a substantial risk of loss in trading futures and options, and probably not suitable for all investors. Only risk capital should be used.