How do you guard against excessive loss in adverse market conditions?

[cj007]

Hi – I have a general question regarding the risks involved in trading futures contracts.

I’m completely new to trading future products, and I’m currently researching the e-mini products. My concern is the level of financial risk involved in the event of usual or adverse market conditions. I’m specifically concerned about what the effects could be if I was long on a particular e-mini futures contract, in the event of a sharp fall in the underlying index due to some external event.

The literature seems to suggest that even if you had a market stop order in place at the time of a sharp fall in the market that this would not stop you from experiencing a greater loss than if the postion were liquidated at the stop order level. This being due to the fact that nobody or no trader would take the opposite side of the contract when the market is in a very sharp decline.

Obviously all trading has its inherent risks, and I’m aware of that, my question is to all experienced futures trades, in that how do you handle this risk and would you be so kind as to share any strategies you may have in place that could mitigate against such risk.

Any help or advice would be much appreciated.

Good Trading to All

Clive S

[Gene]

Hi Clive,

Such situations can be more in financial futures than in commodities. Just an example - S & P 5oo because of 9/11/2001. Or ENRON...It can happens sometimes in commodities too - weather conditions.
There are a few possibilities:
-use futures options instead of stop loss (buy same month put options if long, call if short);
-take an opposite position on a related market;
-reverse your position at a double level - if you can;
-trade the short side only (unusual) - it will reduce your chances to make money;
-trade futures spreads to reduce the risk, etc.
Always pay attention to historical high and low and multiple time frames.
No professional trader will always trade only futures using stop loss, without including other methods - this is just in books and seminars for novices.
All these techniques require a good training; if not traded correct, the losses can be big.
Have a good trading.
Gene

[cj007]

Thanks Gene – I appreciate any help and advice on what looks to be quite a complicated subject.

For those of you who read this thread and wonder why I asked the original question, was because of a Risk Disclosure Statement for Security Futures Contracts sent to me by my broker.

What pricked my attention was Section 1 – Risks of Security Futures – Under certain market conditions, it may be difficult or impossible to liquidate a position.
Apologies for not enclosing the original pdf as it exceeded the max allowable size.

Whilst doing my research I’ve found very little information on what happens if you find yourself on the wrong side of a market or securities crash.

This particular statement mentions only Security Futures, and not Index Futures. I’m hoping the odds of this type of situation on an Index Based futures contract are less likely than on a Security based futures contract.

My intention is not to deter anyone from trading Future Contract. Basically, I think its best to understand completely all the potential risks involved in trading futures before placing a trade.

All the best

Clive